Islamic Banking: The Firewall Against The Global Financial Crisis

Abstract

The global financial crisis that devastated many of the world’s financial systems in a manner never seen before exposed the glaring weakness in risk management and interest-driven policies. The crisis brought the collapse of several iconic financial institutions once perceived to be too strong to capitulate. The crisis engulfed one economy after another from corporations to eventually bring about the collapse of governments of countries reeling from the impact of the crisis. Asset values plummeted and the crisis clearly demonstrated the fragility of the western capitalist system and the free market economy. The Islamic economic and financial system is anchored on universal honorable values, ideals and morals - honesty, credibility, transparency, co-operation and solidarity. These fundamental values uphold stability, security and safety in any financial transactions. Of paramount consideration is that the Shari’ah prohibits any economic and financial transactions that involve usury, lying, gambling, cheating, unsubstantiated risk or uncertainty (gharar), monopoly, exploitation, greed, unfairness and taking other people’s money unjustly. Another key aspect to the philosophy behind the Islamic financial system is money issued must be fully asset backed. It is impermissible to allow money to be traded for money except at par. Islam is not just the prohibition of riba and zakah (alms); it is a comprehensive system to fulfill society’s basic necessities (food, clothing and shelter). History has demonstrated that Islam has the capacity to deliver and has succeeded in providing a viable economic system.