Introduction

The international financial crisis which called 'Credit Crunch' has happened in the summer of 2007, it causing the United States' housing market bubble to rupture. The crisis intimidated the global financial system and depression, thus may leads to a halt increasing wealth and employment of western trade and industry more than a decade (Boeri and Luigi, 2008).

There are two main effects in the U.S. which happened by financial crisis. First, banks have turn out to be not eager to lend money, interest rate has increased. In the year 2008 the value of the bonds next to mortgages has worn-out to $500 million from $1.9 billion. Second, some financial institutions have destroyed (Cecchetti, 2008a).

The third world also has been affected by this crisis, these nations or regions have capitalistic financial markets with a big amount of wealth where but it in a subject of conjecture on the situation of economy and future income floods.

This literature also will talk about the main causes of the financial crisis as all previous literatures talked about. (Abul Hassan)

Financial economy vs. real economy

The view of economics of western countries has changed from industry to services. Over 80% of U.S. economy is represented by the services sector. The financial sector has being big amount of these services. The financial sector is a similar economy which survives next to the real economy and creates nothing real.

Tangible things that can be traded are considered part of the real economy like lands, housing, factories, cars and goods, etc. On the other hand, the financial economy is consists of traded papers with financial values. This value is not constant; it is changeable due to the value people give them.

The value of financial economy rose up and it is now more value than the real economy, the size of bond market now is estimated at $45 trillion, the size of stock markets is …..

Sub-Prime Crisis and Debt Illusion

Understanding Islamic economics

Communism and capitalism economies models have certain characteristics with the Islamic economy, like encouraging people to work, but Islam is not endorses them. Islam is a way of life based on specific pillars, Islam encourage a consciousness of the hereafter in the minds of believers and teaches them not to be conquer by voracity or extremely emotionally involved to money. (Abul Hassan)

Honesty, credibility, cooperation, solidarity and complementarily are some of Islamic moral and ideal values. Islam is encourages people to do it. When the people committed to moral and ideal values, then they get stability, security and safety for all whom involved in financial transactions. The Islamic Shari'ah prohibits, in all financial transactions, interest (Riba), gambling, uncertainty or risk (Gharar), lying, cheating, monopoly, greed, exploitation, unfairness and taking people's money unjustly.

Financial Economics vs. Islamic Economics

There are many differences between the market-based economic system and Islamic economic system, but the main difference is that the market-based economic system is authorizes the money be traded like assets or commodities, and this can be traded for interest.

On the other side, Islamic Shari'ah doesn't allow money to be traded for money except at parity. This helps the financial institutions to generate a huge amount of wealth by credit money and interest-based lending.

Financial Crisis and Islamic Banking:

As we said before, there is a risk-sharing concept in Islam, so if the financial institutions (commercial banks) shared profits and loses with their clients, then this is give it more insure when they deciding which option to funding. This is because the financial profits here depend on the projects performance.

A banking system based on true Islamic values would forbid giving and getting of interest as well as the fake formation of money through the procedure of fractional reserve. In the partial reserve banking practice, banks provide more loans than the money which they really contain in deposits. This makes a big trouble in the financial system, as extremely small equity is able to be used as guarantee to borrow great sums of funds; this is the main cause of financial bubble.

Challenges Facing Islamic banking

The Islamic banking is remains yet in its early phase and it surely faces a lot of confronts due to the truth that Islamic banks work in an financial system that is determined and influenced by interest. In a financial economy, the banking division is held up and regulated by the central bank. The central bank's policies and conditions are shaped for conventional commercial banks and it operates as lender of final option. Unluckily, the majority of Islamic banks don't take pleasure in such privileges.

An additional confront in front of Islamic banks is that they operate under ready events that are diverse those of the conventional banks; the ensuing no matched averted the central banks from managing or providing backing to Islamic banks if a liquidity hole occurs.

Risk Sharing

Money Creation

In an Islamic financial system only the assets the bank has in its ownership can be lent therefore eliminating the ability of banks to make money. Islamic economy needs funds to be completely asset backed and as well believe it taboo to permit money to be operated for money excluding parity. From the Islamic viewpoint a key result of authorizing together making of credit / interest based lending and money is to let banks and additional financial institutions to make huge sums of riches at the cost of the rest of the public.

Demand for Alternatives

Supporter of Islamic banking and finance industry have previously forecasted that the business possibly will have a preparation and this quick increasing business can come up to onward to resolve the financial crisis. At the same time as the comparatively little size of the Islamic finance industry possibly will create this impractical instantly, there survives an unparalleled chance to present the particulars of the Islamic financial system in addition to the answers Islamic finance has for a number of the existing evils.

Significant Challenges

It is optimal moment for foreword of Islamic principles to the market all that has relationship with market. They be supposed to exposed that Islam is much in excess of the ban of charity (zakah) and interest (riba), other than is a complete system to perform society's basic supplies (wearer, food and refuge). In current Islamic financial rules and policy, all the Shariah set of laws addition each other. This implies Islam is too much able to being practical and, actually, has a successful history of trading with financial system evils.

Source: Essay UK - http://turkiyegoz.com/free-essays/finance/credit-crunch.php


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