Islamic Finance: A Bulwark against Contagion in the Global Banking System

Abstract

The objective of this article is to shed some light on the performance of Islamic financial institutions in view of the current global financial crisis. Islamic financial activities and products are conducted in compliance with the shari’ah and, therefore, they are less vulnerable to changes in monetary variables than conventional financial products. Due to the prohibition of interest and because of ethical and moral constraints, Islamic banks are restricted from investment in speculative transactions which lessens default risk and enhances effectiveness of liquidity management. Islamic modes of investment contribute to society’s wellbeing through the creation of wealth and employment to ensure economic stability and human development. In Islam, knowledge, information and work are the main ingredients for success (falah). In an information-intensive world, honesty, accountability and transparency are vital for market performance and business activities. The global financial crisis has caused instability in financial markets weakening confidence in the global economic system as well as increasing uncertainty about future macroeconomic trends.