Faculty / School

Faculty of Business Administration (FBA)

Department

Department of Finance

Was this content written or created while at IBA?

Yes

Document Type

Conference Paper

Publication Date

5-1-2018

Author Affiliation

  • Dr. Ishrat Husain is Professor Emeritus at IBA.

Conference Name

Annual meeting of Islamic Financial Services Board

Conference Location

Kuwait

Conference Dates

May 1, 2018

First Page

1

Last Page

8

Keywords

Islamic Finance, Financial Stability, Risk Sharing, Infrastructure Financing

Abstract / Description

I would like to submit that after a decade we have much better knowledge about the factors that precipitated the 2008 global financial crisis. We know that financial engineering in which instruments such as complex derivatives, Collateralized Debt Obligations raised to square or cube, Credit Default Swaps, slice and dice securitized portfolio backed only by a trail of papers without any backing of real assets, and individual tranches rated by Credit Rating agencies led to excessive risk taking by the banking industry. We also know that the theory of decoupling was proved wrong, the Contagion effect was quite strong, widespread and spread instantaneously. This interconnectedness was limited not only to the regulated financial institutions across borders, but also between the regulated and shadow banking systems. The regulations and banking supervisions were not able to keep pace with either the rapidity or complexity of financial engineering perpetuated by the industry. Therefore, the capacity to appraise risk properly fell short. Risk Mitigation strategies were ineffective as the source from which risk was arising could not be properly identified. These shortcomings and weaknesses of the conventional banking system, and the huge damage it caused to the global economy and international financial stability, should have naturally paved way for broader acceptance and spread of Islamic banking – a system under which financial stability is in-built.

Download

Included in

Finance Commons

Share

COinS