ISLAMIC FINANCE: CAN IT BE A REMEDY FOR FINANCIAL CRISES? I. INTRODUCTION
The financial system is at the heart of the modern economy. When this system works well, it enables to allocate resources that maximize the productivity of the economy. On the contrary when it does not work properly, the whole economy starts to decline. Because financial system must be considered as an in-built part of real economy in terms of credit mechanism. The recent global financial crisis began in August 2007 and after this time it spread gradually to the financial markets in the world. Although it is not severe as in its beginning phase but recovery is not but its aftershock is still going on. There has been numerous research conducted by many economists and analysts. According to the many of these studies, risky transactions, lack of surveillance, and greed that underlie this financial crisis.
The relationship between Islamic finance and the financial crises has been discussed by many authors in some of these research. All those works has been done after the beginning of the global financial crisis. Thanks to its strength aspects include risk sharing mechanism, strict Sharia governance rules, tighter supervision and transparency policy, almost all of these works have been concluded that Islamic finance may make significant contributions to prevent financial crises like the current one. Also the reality of the limited impact of the current global financial crisis on Islamic Finance-based institutions support this compliance to some extent. All for these and below reasons the prospect for growth of Islamic finance products and services appears to be strong globally in the aftermath of the current global financial crisis.
Due to its strict and strong rules as compared to the conventional one, Islamic finance may provide the substantial contribution to reduce the effect of the global financial crisis, which was mainly triggered by risky and leveraged transactions.
The purpose of this paper is to consider the fundamentals of Islamic finance and to find an answer to the question in the title. Since there are time and scope constraints, it is unavailable to prepare an empirically supported paper.

II. FINANCIAL CRISES: WHAT IS TRIGGERED? The term ‘financial crisis’ is applied broadly to a variety of situations in which some financial assets suddenly lose a large part of their nominal value. The global financial crisis of 2007–2008, which was initially referred to in the media as a “credit crunch” or “credit crisis”, began in August 2007. In recent study of Islamic Finance and Global Financial Crises, (Zerban et al., 2012) stated “When a loss of confidence by investors in the value of securitized mortgages in the United States it resulted in a liquidity crisis, which prompted a substantial injection of capital.”
The global financial crisis turned systemic in September 2008 when Lehman Brothers, which was one of the rooted investment company defaulted and A.I.G, which is one of the biggest insurance company was bailed out. As stated above, the failure of some of the world’s largest financial institutions shows the fragility and interconnectivity of financial systems. The effects of the current global financial crisis, which is considered by many economists and analysts the worst one since the Great Depression, hit not only to the financial markets but also real economy. Even though the collapse in the US sub-prime mortgage market has been considered as a triggering event, the underlying reasons for the current financial crisis are several, but in this paper two of these reasons will be mentioned.
One of the main reasons can be related to the macroeconomic perspective. By the reasons of financial liberalization, monetary policy makers have pursued a low-interest rate policy, which contributed to the housing boom (asset bubble) in the US and some European countries. The low interest rate policy lead for financial market participants to embrace higher risk in search of higher yield. The other reason can be associated with the microeconomic perspective. Technological advances and financial innovations have fundamentally changed debt generation without income guarantee. Debt generated by using assets as collateral without a clear link to the ability of income to repay debt led to a great leverage in the system. In other words, the root causes of this crisis relates to the usage of extremely high leverage and delinking of financial products from their underlying real sector assets.
Moreover, Khorshid (2012) summarizes the underlying reasons for the global financial crisis as follows easy money, uncontrolled growth of credit and debt, lax regulation and supervision, innovation of complex and opaque financial products, mismanagement of risks involved, lack of disclosure and transparency, predatory lending and high leverage.
Beyond all these reasons, as Alchaar who is the head of the Accounting and Auditing Organization for Islamic Financial Institutions pointed that we are facing today a dilemma of compounded greed of individuals, institutions and nation states. Many individuals were trying to buy better houses than they can stand for, institutions who are gambling on the benefit of each other through the creation of credit default swaps and nation states with the laxity of regulation (as cited in Zerban et al., 2012, p. 204). Since the sense of greed is unavoidable and might be the heart of the motives of investment, the other tangible reasons must be analyzed the nature of this financial crisis. But this side of the financial crisis has not been analyzed thoroughly. Some authors like Chapra (2009) states that the greed to maximize profit, wealth and consumption by any means in keeping with the mores of the prevailing secular and materialist culture.
Overall the current financial crisis presents many lessons and opportunities for Islamic Finance, which may play a key role for further development in the stability of the world financial system. After completing this section short and it will be given some brief information about basic Islamic finance rules, which are highly related to assertion of being a remedy to financial crises in the next chapter.

III. ISLAMIC FINANCE: BASIC PRINCIPLES
In this section, it will be given some brief information about the fundamental principles that make ‘conventional finance’ Islamic finance. The concepts in Islamic and conventional finance differ from each other in some aspects. According to the some market participants there is no significant difference between the two concepts. So it is very crucial to point out the differences between Islamic and conventional finance. Chapra (2009) claims that as the realization of greater justice among human society, core values and principals of Islam impose rules and principles, which are subjected to all aspects of human life as well as financial system. Moreover, Zerban et al. (2012) states that Islamic financial rules, which originate from Islamic law, which is based on the sacred book of Muslim people- forces investors to consider the society’s welfare and to take into consideration the ethical and moral hazards of any investment. Mashal (2012) defines that the basic framework for Islamic financial system is a set of rules referred “Sharia”.
Research by Derbel et al. (2011) summarizes this rules below;
“The foundations of Islamic finance are based on 5 core principles: * The prohibition of riba (interest): Unlike conventional finance, Islamic finance prohibits riba. This term refers to two distinct concepts in the terminology of conventional finance, namely the interest rate and usury. The prohibition of the practice of interest is not foreign for other religions. Indeed, it also prevailed among Christians and Jews. The prohibition of riba in Islam finds its origin in the Quran, the sacred book of Muslims and the main source of Islamic law. The Quran forbids expressly, in several times, the practice of riba. * The prohibition of gharar (incertainty) and maysir (speculation and random): The concept of gharar refers to any exchange in which there is an imprecise, ambiguous, or uncertain element. (The term is also being defined “excessive risk taking” AD). The uncertainty in case of sale of a future product consists in the impossibility of predicting the quality and/or the quantity of the sold product. The transaction is in conflict with the Sharia principles only if the terms of the exchange are conditional on a dubious future event which does not depend on the contractors. The maysir is defined as any form of contract in which the right of the contracting parties depends on a random event, such as gambling. The operations which rest on pure speculation in order to carry out a profit are illicit (haram) and thus are prohibited in Islamic law. * The prohibition of investment in haram (illicit) activities: The financed assets must be halal, i.e. relative to an activity in conformity with Shari’a, which exclude for example the activities related to the sectors like alcohol, the armament, the pornography etc. * Tangibility of assets: According to the rules of Shari’a, any financial transaction must be leaned with a tangible asset (like a real estate for example). So, financial products such as subprime mortgages cannot be created in this system.” In other words, the pillars of the Islamic credit system is closely related to the real economy and the tangible assets as well. * Sharing of profits and losses: It advocates an equitable sharing of profits and risks between the investor (the lender) and the contractor (the borrower) whatever the form of financing used.
Furthermore, Chapra (2011) refers that in any financial activities must be performed under the basic rules of Islamic finance must take into consideration the following principles:
• the asset which is being sold or leased must be real, and not imaginary or notional,
• the seller must own and possess the goods being sold or leased,
• the transaction must be a genuine trade transaction with full intention of giving and taking delivery, and
• the debt cannot be sold and thus the risk associated with it cannot be transferred to someone else. It must be borne by the creditor himself.
Moreover, Othman et al. (2012) noted that the practice of paying and receiving interests, considered together as an artificial creation, is prohibited. Despite the fact that the great reliance on equity in the concept of Islamic finance it does not mean debt financing unless it should not be promoted for inessential and wasteful consumption and unproductive speculation is completely ruled out (Chapra, 2009). So all these unique aspects differentiate Islamic finance concept from the conventional one.
Another aspect of Islamic finance must be mentioned with regard to macroeconomic policy concept It is also a fundamental variation of two economic concepts (capitalist market-oriented and Islamic economics excluding socialist economics). From the ‘Islamic’ point of view, money should be considered as a medium of exchange, a standard of measurement and it could not be traded without an economic activity (Khorshid, 2012). Furthermore, Derbel et al. (2011) states that interest rate is not used as monetary policy instrument in Islamic finance, which differentiates Islamic finance from its counterpart. This notion is closely related to the prohibition of interest rule, which is at the heart of all Islamic based financial activities.
Except from the prohibition of interest rule mentioned above, the other most important rule must be pointed out for visualization of the full concept. That is the profit-and-loss sharing mechanism. Chapra (2009) clarifies that Islamic finance should, in its ideal form, help raise substantially the share of equity in businesses and of profit-and-loss sharing (PLS) in projects and ventures through the muḍārabah (profit sharing) and mushārakah (joint venture) modes of financing. More precisely, as a cornerstone of Islamic finance is the principle of PLS, which is predominantly based on the muḍārabah and mushārakah concepts of Islamic based contracting. The key feature that makes Islamic finance less vulnerable to risks than conventional finance is the performing of financial operations under the PLS structure. Thanks to PLS mechanism, Islamic finance based financial institutions are theoretically better positioned than conventional counterparts to absorb external shocks. IV. ISLAMIC FINANCE: CAN IT BE A REMEDY FOR FINANCIAL CRISES?
In this section, it will be sought an answer to the main question in the title. According to the proponents of Islamic finance, there is much more evidence that the Islamic finance based financial concept is being assumed as an alternative.
Firstly, it should be noted that Islamic finance has its own logic. It has not only a legal or religious terms but also the underlying economic rationale. As stated in the third section, the relatively conservative structure of Islamic financial products and services, which involve profit-and-loss sharing, joint ventures, leasing, and other methods are mostly peculiar to Islamic finance, have played a key role in the stability of Islamic financial institutions during this financial turmoil. Moreover, the absence of non-productive activities in Islamic finance made it a more stable system than the conventional finance (Derbel et al., 2011).
Furthermore, there are a few studies, which support this thesis empirically in the academic world. According to the result of an empirical study in which used financial data from 4 different countries, the United States, France, Saudi Arabia and Indonesia, were used the transmission of the current crisis is weak in the markets, which are based on Islamic finance (i.e. Saudi Arabia and Indonesia) (Derbel et al., 2011). Comparative studies also conclude that the Islamic financial institutions have survived the global financial crisis. The underlying reasons for all these achievements are that the Islamic financial institutions did not generate outsized leverage or make investments in structured financial products and derivatives. Also compared to the conventional (i.e. interest-based) financial system, Islamic finance, which is profoundly asset-based structure and could be regarded as an alternative to the current financial system (Zerban et al., 2012).
Although Islamic finance is supported by many followers, there are some counter arguments with regard to being an alternative to the conventional finance. As claimed by Chapra (2009) who is also a supporter of Islamic finance, some institutions, which are crucial to minimize the risks associated with anonymity, moral hazard and principal/agent conflict of interest and late settlement of financial obligations have not yet been established. However, the only factors that Sharia would not have eliminated its effect are those related to mal-practice and behavioral and ethical issues that should be discouraged throughout market mechanism or legal condemnation, which is the holding nature of it (Zerban et al., 2012). Owing to the core principles of Islamic law, there is no more proper instruments that allow to Islamic finance based financial institutions to manage their liquidity as efficiently as the conventional interest-based financial institutions. According to Khorshid (2012) the standardization of Islamic financial products and institutions is another key issue for being considered as an alternative to the conventional finance.
On the other hand, the threat for the Islamic finance is to stay in limbo and to strike a balance between the practical form and ideal form of these rules. The question is how the basic principles, which are totally opposite to the conventional finance of this concept can be implemented thoroughly. For instance the prohibition of gharar (excessive risk taking in the financing business) or riba (interest) and the implementation of profit-and-risk sharing concept are all issues need to be solved. Because in today’s financial world the conventional finance practices are dominantly used by market participants. For clarifying this point Mashal (2012) states that “The challenge for the Islamic financial system is to consolidate itself to be able to better compete with global players through achieving scale, efficiency and cost effectiveness in addition to rapidly building its capacities to standardize regulation and supervision, and accounting practices, while strengthening the governance of the industry.”
Finally as Chapra (2009) emphasizes that the result is that the Islamic financial system, as it is being practiced, does not appear to be a genuine reflection of what it is expected to be. After all above constraints, it can be concluded that a financial system that is driven by true Islamic principles will succeed to prevent a financial crisis (Othman et al., 2009).

V. CONCLUSION
As explained in the previous sections, there is much more evidence, which proves that Islamic financial institutions have been less affected by the crisis than the conventional financial institutions.
Although it has some disadvantages including lack of prevailing and educated human resources, and standardization worldwide, compared to its conventional counterpart, Islamic finance may make a significant contribution to prevent future financial crises, which generally is associated with uncontrolled growth of credit and debt, lax regulation and supervision, innovation of complex and opaque financial products, mismanagement of risks involved, lack of disclosure and transparency, and high leverage (Khorshid, 2012). Islamic finance has some handy tools like profit-and-loss sharing mechanism, which can provide some benefits for filling loopholes of the current financial system. For all these reasons, due to its strict and strong rules as compared to the conventional one, Islamic finance may provide substantial contribution to reduce the effect of financial crises, which is mainly triggered by risky and leveraged transaction.
Finally, the current global financial crisis presents many lessons and opportunities for Islamic finance, which may play a key role for its further development with the stability of world financial system.

BIBLIOGRAPHY
CHAPRA M. U. (2009), “The global financial crisis: Can Islamic finance help minimize the severity and frequency of such a crisis in the future?” Journal of Islam and Civilizational Renewal, Vol. 1 No. 2, pp. 226-245.
DERBEL H., BOURAOUI T., DAMMAK N. (2011), “Can Islamic Finance Constitute A Solution to Crisis?” International Journal of Economics and Finance, Vol. 3 No. 3, DOI:10.5539/ijef.v3n3p75
EL HUSSEIN, N.H.A. (2013), “Islamic Finance: Is it a viable option to restrain financial crisis?” Interdisciplinary Journal of Contemporary Research in Business, Vol: 5 No: 4, pp. 576-588.
KHORSHID A. (2012), “Global Financial Crises and Its Effect on Islamic Finance” http://dx.doi.org/10.2139/ssrn.2188146
MASHAL A. M. (2012), “Islamic Financial in the Global Financial System”, Asian Economic and Financial Review, Vol.2 No.1, pp. 207-223.
OTHMAN R., ABDUL ARIS N., MOHD AZLI R., ARSHAD R. (2012), “Islamic Banking: The firewall against the global financial crisis”, The Journal of Applied Business Research, Vol: 28 No: 1.
TRABELSI M. A. (2011), “The impact of the financial crisis on the global economy: can the Islamic financial system help?” The Journal of Risk Finance, Vol. 12 No. 1, pp. 15-25, DOI 10.1108/15265941111100049
ZERBAN A., ELKADY E.H., OMAR R. F. (2012), “Islamic Finance and Global Financial Crises: How to Keep Finance on Track?” Topics in Middle Eastern and African Economies, Vol. 14. www.wikipedia.org www.investopedia.com

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[ 1 ]. Since the underlying reasons are almost same in all types of financial crises, unless otherwise specified the current global financial crisis will be referred in this paper.
[ 2 ]. http://en.wikipedia.org/wiki/Financial_crisis (Access date: 10/30/2013)
[ 3 ]. Systemic refers to something that is spread throughout, system-wide, affecting a group or system, such as a body, economy, market or society as a whole.
[ 4 ]. The failure to promptly pay interest or principal when due.
[ 5 ]. A situation in which a business, individual or government offers money to a failing business in order to prevent the consequences that arise from a business's downfall.
[ 6 ]. A type of mortgage that is normally made out to borrowers with lower credit ratings.
[ 7 ]. An economic bubble (sometimes referred to as an asset bubble specifically) is described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.
[ 8 ]. The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation.
[ 9 ]. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
[ 10 ]. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari'a standards for Islamic financial institutions and the industry.
[ 11 ]. A derivative is a financial contract which derives its value from the performance of another entity such as an asset, index, or interest rate, called the "underlying".