Islamic finance

Global financial crisis: an Islamic finance
Author(s):Adel Ahmed (Business School, Liverpool Hope University, Liverpool, UK)
– The purpose of this paper is to initially contribute the literature linking the global financial
crisis and the Islamic finance model which is competent of playing down the severity and
frequency of financial crises, by introducing the financial system based on sharing in the risk. It
links credit expansion to the growth of the real economy by allowing credit primarily for the
purchase of real goods and services which the seller owns and possesses, and the buyer wishes to
take delivery. It also requires the creditor to bear the risk of default by prohibiting the sale of
debt, thereby ensuring that he evaluates the risk more carefully. It is important for everyone's
future that we study the current crisis in order to develop sustainable financial practices and in
quest of a new business model based on sharing the profit and loss.

– The divergence approach is used for exploring possibilities and constraints of inherited
situations by applying critical thinking and analysis through the published literature in Islamic
finance. This is to create new understandings of international finance and using new banking
business model towards better design solutions for the current global financial crisis and
preventing more collapse in the future.

– A new business model for the banking system based on non‐interest‐based transactions but
profit and loss sharing should be in practice at the financial system. The financial institutions
should encourage business and trade activities that generate fair and legitimate profit. In Islamic
finance, there is always a close link between financial flow and productivity. This intrinsic
property of Islamic finance contributes towards insulating it from the potential risks resulting
from excess leverage and speculative financial activities which are part of the root causes of the
current financial crisis.

Research limitations/implications
– This paper is based on published research papers but does not include empirical investigation.

Practical implications
– The new business model based on Islamic finance principles will help in financing businesses
by using alternative methods to the banking systems or as a different way to run our banking
system. The Islamic finance system with proper checks and controls introduces greater discipline
into the economy and links credit expansion to the growth of the real economy.

– The paper sheds new light on the relationship between the Islamic finance model and a new
business model for the financial institutions to be used in order to think through how to prevent
future financial collapses and make capital markets work more effectively.

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