The Looming International Financial Crisis: Can the Introduction of Risk Sharing in the Financial System as Required by Islamic Finance, Play a Positive Role in Reducing Its Severity?

Abstract

The paper discusses the causes of financial crises and, in particular, the most recent one which started in 2007 and lasted for around 19 months. It argues that since one of the major causes of the crises is the unhealthy rise in international debt in recent years, it is very likely that there will be another serious crisis in the near future because the factors that enable the banks to lend excessively continue relatively unperturbed. The paper then argues whether it is possible for the healthy discipline that the fundamental principles of Islamic finance try to build into the financial system can help rein to some extent the excessive credit extension and thereby contribute to a reduction in the severity and frequency of such crises in the future.