The global financial crisis and Islamic finance: a review of selected literature

Abstract

Purpose – This paper aims to critically analyze the opinions of Islamic economists about the global financial crisis to examine: their views on the causes of the crisis, the juristic and economic assessment they make of these causes and the lessons learned and the way forward. Design/methodology/approach – The paper critically reviews selected writings of prominent Islamic economics on the recent financial crisis. Findings – Most of the authors reviewed acknowledged the technical mistakes put forth by many conventional analysts as causes of the crisis. However, they have showed that the adoption of the principles of Islamic finance would have prevented most of those mistakes. The way forward, therefore, for both Islamic and conventional finance is, inter alia, greater reliance on risk sharing to inject more discipline in the system; the establishment of a strong and comprehensive regulatory body to safeguard the resilience of the system; and the integration of Zakat, Awqaf and other voluntary institutions into the financial system to cater for the financial needs of the poor. Practical implications – The importance of integrating the voluntary institutions into the financial system is to make it more inclusive and more equitable. Originality/value – This paper is the most comprehensive literature review on Islamic finance and the global financial crisis.