March 21, 2008
THE GLOBAL ECONOMIC CRISIS: CAN ISLAMIC FINANCE HELP MINIMIZE THE SEVERITY AND FREQUENCY OF SUCH A CRISIS LATER ON? by Meters. Umer Chapra*
(A conventional paper prepared pertaining to presentation in the Forum within the Global Financial Crisis to become held on the Islamic Creation Bank about 25 October 2008)
* The author is Exploration Adviser with the Islamic Analysis and Training Institute (IRTI) of the Islamic Development Lender (IDB). This kind of paper is actually a revised and updated version from the keynote Community forum lecture delivered by him at the inaugural session with the Eighth Harvard University Forum on Islamic Finance held on 19-20 April 2008 in the Harvard Law College. The views expressed in this paper will be his personal and do not necessarily reflect those of IRTI or perhaps IDB. He's grateful to Shaikh Muhammad Rashid intended for the excellent secretarial assistance this individual has provided. He is as well grateful to Bashir Khallat, Acting Director of IRTI, for the encouragement and support he has presented and to his colleagues, Drs. Sami alSuwailem, Tariqullah Khan and Salman Syed Ali for their valuable comments on an earlier draft.
ABSTRACT The paper attempts to determine the main cause or perhaps causes of the financial crises that have plagued almost every country around the world over the last three decades. Of particular significance are the 1998 LTCM malfunction and the prevailing subprime home loan crisis in the usa which is worse than virtually any in the past and has had damaging spillover effects worldwide. It argues that you of the major reasons of these entree is the deficiency of adequate marketplace discipline inside the financial system. This may lead to excessive loaning, high leveraging and eventually the crisis. Unwinding brings about a vicious cycle of selling that feeds about itself and leads to a steep fall in advantage prices accompanied by bank failures and monetary slowdown. Risk-sharing along with the availability of credit intended for primarily the purchase of actual goods and services and restrictions within the sale of financial debt, short sales, abnormal uncertainty (gharar), and betting (qimar), which in turn Islamic financing stands for, may help inject better discipline in the system and, thereby, substantially reduce monetary instability. ADVANTAGES The economic climate has highly played a working role inside the accelerated advancement the world overall economy, particularly after the Second World War. An unending stream of financial enhancements, including the trend in details and telecommunications, has played out a crucial function in this creation. The system is definitely, however , now plagued by prolonged crises. According to one estimation, there have been a lot more than 100 downturn over the last four decades (Stiglitz, 2003, s. 54). Not only a single physical area or perhaps major country has been spared the effect of these crises. Possibly some of the countries that have generally followed sound fiscal and monetary policies have become engulfed in these entree. The current financial crisis, which in turn started in the summer of 3 years ago, is more extreme than any in the past and shows not any sign of abating despite a coordinated entente out of three to four trillion dollars by the US, the UK, Europe and a number of other countries. It has seized-up money markets and triggered a precipitant, precipitate decline in property and stock principles, bank failures, and worried anxiety about the destiny of the global economy plus the financial system. This has created an uneasy feeling that there is anything basically incorrect with the program. There is, hence, a call for a new architecture. The new buildings demands a great innovation that can help prevent the outbreak and spread of crises or perhaps, at
least, lessen their frequency and seriousness. Since many of the crises skilled around the world are often of a severe nature and have been recurring continuously, cosmetic changes in the existing program may not be adequate. It is necessary to offer an innovation that might be really powerful. It may not always be possible...
References: International Budgetary Fund (September 1998), World Economic Outlook (Washington, DC: IMF).
International Monetary Fund, (December 1998), World Economic Outlook, and International Capital Markets (Washington, DC: IMF)