This article highlights that the primary architecture of the conventional financial system induces financial crises as it does not legally “tie the knot” between nominal and real transactions. This legal binding would require replacing interest-based mechanisms with an arrangement where nominal transactions are backed up by real transactions and a ban on securitisation of nominal assets that is based on the principles of risk transferring rather than risk sharing. The argument underlying our contention is that the extent of the negative impact of any crisis would be proportional to the gap between the nominal and real economy, and the mechanisms governing the distribution of risk. That is why, as advocated by proponents of Islamic Finance, the Islamic financial sector showed resilience during the global financial crisis (GFC). There is however no serious academic effort that formally presents the case of Islamic Finance. This article intends to fill this gap by taking stock of the literature on GFC and relates the discussion to the financial architecture proposed in Islamic finance."> This article highlights that the primary architecture of the conventional financial system induces financial crises as it does not legally “tie the knot” between nominal and real transactions. This legal binding would require replacing interest-based mechanisms with an arrangement where nominal transactions are backed up by real transactions and a ban on securitisation of nominal assets that is based on the principles of risk transferring rather than risk sharing. The argument underlying our contention is that the extent of the negative impact of any crisis would be proportional to the gap between the nominal and real economy, and the mechanisms governing the distribution of risk. That is why, as advocated by proponents of Islamic Finance, the Islamic financial sector showed resilience during the global financial crisis (GFC). There is however no serious academic effort that formally presents the case of Islamic Finance. This article intends to fill this gap by taking stock of the literature on GFC and relates the discussion to the financial architecture proposed in Islamic finance."> This article highlights that the primary architecture of the conventional financial system induces financial crises as it does not legally">
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The Underlying Cause of the Global Financial Crisis: An Islamic Perspective

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  • Nauman Ejaz
  • Hayat Khan
Abstract
type="main" xml:id="ecpa12060-abs-0001"> This article highlights that the primary architecture of the conventional financial system induces financial crises as it does not legally “tie the knot” between nominal and real transactions. This legal binding would require replacing interest-based mechanisms with an arrangement where nominal transactions are backed up by real transactions and a ban on securitisation of nominal assets that is based on the principles of risk transferring rather than risk sharing. The argument underlying our contention is that the extent of the negative impact of any crisis would be proportional to the gap between the nominal and real economy, and the mechanisms governing the distribution of risk. That is why, as advocated by proponents of Islamic Finance, the Islamic financial sector showed resilience during the global financial crisis (GFC). There is however no serious academic effort that formally presents the case of Islamic Finance. This article intends to fill this gap by taking stock of the literature on GFC and relates the discussion to the financial architecture proposed in Islamic finance.

Suggested Citation

  • Nauman Ejaz & Hayat Khan, 2014. "The Underlying Cause of the Global Financial Crisis: An Islamic Perspective," Economic Papers, The Economic Society of Australia, vol. 33(1), pages 45-54, March.
    • Handle: RePEc:bla:econpa:v:33:y:2014:i:1:p:45-54
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    File URL: http://hdl.handle.net/10.1111/ecpa.2014.33.issue-1
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    Cited by:

    1. Hayat Khan, 2015. "Some Implications of Debt versus Equity-Based Financing in the Backdrop of Financial Crises بعض آثار الديون مقابل التمويل القائم على الإنصاف في خلفية الأزمات المالية," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 28(1), pages 165-180, January.
    2. Hassan, Kamrul & Hoque, Ariful & Gasbarro, Dominic & Wong, Wing-Keung, 2023. "Are Islamic stocks immune from financial crises? Evidence from contagion tests," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 919-948.
    3. Hassan, Kamrul & Hoque, Ariful & Wali, Muammer & Gasbarro, Dominic, 2020. "Islamic stocks, conventional stocks, and crude oil: Directional volatility spillover analysis in BRICS," Energy Economics, Elsevier, vol. 92(C).
    4. Hadhri, Sinda, 2021. "The nexus, downside risk and asset allocation between oil and Islamic stock markets: A cross-country analysis," Energy Economics, Elsevier, vol. 101(C).
    5. Ghallabi, Fahmi & Yousaf, Imran & Ghorbel, Ahmed & Li, Yanshuang, 2024. "Time-varying risk spillovers between renewable energy and Islamic stock markets: Evidence from the Russia-Ukraine conflict," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).

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