Global Financial Crisis and Islamic Finance

This paper examines the causes and impacts of the current financial and economic crisis. It also discusses Islamic finance as a viable alternative to the ailing global financial system.

The current financial crisis began in July 2007, and brought with a liquidity crisis due to loss of confidence in mortgage credit markets in the United States. The crisis led to strong downward fluctuations in stock markets, reduced rates of economic growth, volatile exchange rates, and squeezes in demand and consumption, resulting in a drop in industrial production and international trade flows.

The crisis has led to evaluation of the foundations of the capitalist financial system, and engendered a search for ideas and solutions. Islamic economists believe that:

• Islamic finance, with its ban on interest and uncertainty, adherence to risk-sharing and profit-sharing, and promotion of ethical investments would help people get out of the crisis;
• Islamic finance has an alternative that would prevent the recurrence of a similar crisis;
• Structural reforms such as adjusting the rate of interest and revising the tax rate would help to get out of the crisis.