...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...
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...Financial Concepts and Financial Crisis "Financial Concepts and Financial Crisis" Please respond to the following: Explain at least two (2) ways financial systems and markets have had an impact in your life in the past or may impact you in the future. Financial markets and systems have an impact in my everyday life and will continue to do so in the future. I have funds in savings and I have various investments in which I am consistently monitoring and making alterations. Financial systems and markets allow for the generation and flow of funds. I am able to go to banks, withdraw, deposit, and borrow funds. I can invest funds in various forms in the stock market or otherwise. In doing this, financial systems and markets have allowed me to gain and lose funds. Overall these systems and markets allow the ease and transfer of funds, whether it be between persons, institutions, governments, or otherwise. Determine at least one (1) course of action the Federal Reserve can take to minimize the negative impact that a financial crisis could potentially have on the U.S. economy. Provide support for your response. One course of action the Federal Reserve can take to minimize the negative impact that a financial crisis could have on the economy is to be innovative. The Fed must leave room for it self to be more “fluid” and be able to adapt to changes as they come. Following strict guidelines and procedures that have been in place for years does not lend...
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...Thomas Friedman discusses how 10 principle concepts, in summary, allow easy transfer of capital and information around the world. His concept, that the “world is flat”, emboldens global competition with the possibilities of an equal ‘playing field’ due to the 10 “flatteners”. Friedman’s main focus was on the equal opportunity for corporate businesses globally, but from a financial market perspective, the ease in which capital flows is also encompassed in the “world is flat” concept. Due to technological advances, the global financial market has been refined with electronic exchanges, networks, institutions, and communications. Each country may have its own financial market, but the world is so closely tied together, causing global affects when one market is prospering or suffering. Currently all eyes are on Europe and the “Euro Crisis” stemming from their uncontrollable debt. There are discussions of a $1 trillion dollar bailout for the 16 “Eurozone” countries, which could ultimately cost and estimated $3 trillion or bankruptcy. Greece and Ireland are in the forefront of the countries in financial ruin. With the media making the entire world aware of these countries financial crisis and their insolvent state, investors are reluctant to continue to buy bonds that may not payoff. These investors are expected to bring in cash flow buy buying bonds so the European country can pay back the bank loans with extremely high interest. European Central Bank, responsible for...
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...In 2008 the US hit a Financial crisis, the biggest since The Great Depression. Which cost over $20 trillion, along with the millions of people who lost their jobs and homes due to this crisis. In the documentary “Inside Job” it is explained how the main cause of this Financial crisis was the deregulation of financial institutions in the 1980’s. These financial institutions include banks, insurance companies, Credit Rating Agencies, and many more. After the deregulation a lot of companies and institutions were caught in frauds, money laundering, bribe, cooking books, and dirty business. If not all, the majority of the people running these institutions and the people that work there are self-motivated, meaning they only care about the profit...
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...fair value can be made using the expected cash flow of such assets, provided the estimates has also reflects the adjustment of a willing buyer in the risk of default. This concept created transparency on the value of the assets which was easily confirmed by the auditors and users of the financial statements. However, during the recent economic crisis, this concept has created havoc on the balance sheets of some major financial companies. These financial companies were forced to write down assets in which the market has dried up and made it hard for them to value these financial assets. Since these financial assets were also used as a requirement for the liquidity ratio of some financial institutions, the write down of these financial assets caused the ratio to fall and trigger some margin calls. Many financial institutions decided to horde cash in order to preserve their ratio which caused the credit market to dry up. Most bankers argued the requirement of fair value accounting unfairly punished financial companies and caused their ratio to fall. Thus, they were lobbying the governments to ease up on fair value accounting and try to establish ways to determine the value of the written down assets they are holding to reflect the ‘true’ value. On early March 2009, U.S House of Representatives Financial services subcommittee on Capital markets, Insurance and Government sponsored entities called Robert H. Herz , the chairman of FASB, to testify regarding the use of fair value...
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...planning, and formal risk identification performed to provide a picture of the composite or overall risk associated with an organization. Also an effective risk mitigation strategy will provide a significant increase in the confidence level that a business or organization will meet its cost, schedule, and performance requirements. Introduction Risk is an important concept that plays a major role in the success of a business and organization. Risk is defined as the exposure to injury or loss. Every decision that we make as human beings contain some form of risk and most of the time the weight of the risk determine whether we will follow through with an action or not. Risk Management is a systematic way to keep those risks in check and a way to limit those risks in impacting the goals and life-span of an organization or business. Fred Kaen defined risk management in his article Risk Management, Corporate Governance and the public Corporation as the identification, and management of organization or enterprise exposure to financial risk. However, not only does risk management identified financial risk of an organization, it also identify and analyze the uncertainties...
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...Global Economic Crisis – Immediate Solution The turbulence we are going through is unprecedented in the world History. What started as A financial institution failure, affected not only the leading financial institutions in the world but also the major developed economic systems in the world leading to a systemic failure. Unlike in the past , when it had an impact on only a few countries and few asset classes, this time, the crisis had its effect on almost all countries in the world and all asset classes. The crisis had a contagion effect and spread far and wide without an end in sight creating more and more uncertainties day by day. When Government creates stimulus it goes to increase the government debt making the government vulnerable to financial weakness. In a few cases , where there was a government failure, investors have taken an hair cut in their investments. But in General, Sovereign debt is supposed to be more trustworthy since Central Banks can print money to lend it to the government when in need. Governments in an effort to stop economic slide, tried many measures including Monetary and Fiscal Stimulus but black swan events had overtaken the efforts of governments. Many of the developed countries printed more money and tried to stimulate the Economic Growth and reduce the unemployment. But it has gone into a spiral. The only effect is the outstanding debts of governments are going up, their credit rating is being downgraded and there was a lot of trust...
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...Islamic Finance: A Therapy for Healing the Global Financial Crisis Miranti Kartika Dewi 1 *Researcher of Centre for Islamic Economics and Business ** Lecturer of Department of Accounting Faculty of Economics, University of Indonesia Ilham Reza Ferdian * Student of Master of Science on Finance Programme Kuliyyah of Economics and Management Sciences International Islamic University Malaysia ** Fellow of PT. Bank Muamalat Indonesia ABSTRACT Global financial crisis which hit many too-big-too-fail countries and financial institution in the world was mainly made happen by debt securitization. Derivative instruments resulted from this process obviously were not backed by real asset. When any party came up with investment on these instruments, the investment would never support the development of real sector economy, instead, it just worsen the situation by creating bubble economic. This condition becomes more harmful when the securitized debts default. This practice is strictly forbidden according to Islamic finance principles. It has inherent risk management tools to prevent the crisis. This paper attempts to examine the root of the financial crisis and find the solution from Islamic finance principles. Keywords: Financial crisis, Derivative, MBS, CDO, CDS, Islamic finance 1 Corresponding author can be contacted by email: miranti_k_dewi@yahoo.com. “The credit and capital markets have grown too rapidly...
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...John Cassidy describes what he calls utopian economics and how the utopian thinking has led to economic crisis such as job losses, bank bailouts, and corporate greed. Cassidy attempts to convince that utopian economics does not capture the true behaviors of humanity collectively leading to unanticipated and adverse economic outcomes. He presents the history of economics and contrasts the idea of utopian economics with reality based economics. Reality based economics encompass people’s behaviors and thinking identifying irrational self-interests (Cassidy, 9). Cassidy then explains in detail how economic theory and practice influenced the “Great Crunch” (i.e. collapse in sub-prime mortgage lending during last decade). The timeliness of Cassidy’s publication of a book to address how markets fail is certainly ideal in light of the recent crash in sub-prime mortgages. The financial impact of this economic crisis continues to dictate the pace of the current economy. Not only is the topic stimulating to a graduate MBA student, but has value to inform and enlighten individuals in all disciplines. Cassidy uses the history of economics over the last few decades to demonstrate that his idea of utopian economics versus reality based economics is not new, but has been forgotten and/or consciously overlooked in the interest of other gains causing historical cycles of economic crisis. Cassidy’s political views are evident and he does not...
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... Financial crisis The financial crisis usually refers to disruptions in financial markets causing stress to the flow of credit to families and businesses and thus having a negative effect on the real economy of goods and services. The term is generally used to describe a variety of situations in which investors lose unexpectedly substantial amount of their investments, and financial institutions suddenly lose significant proportion of their value. Financial crises include, among others, stock market crashes, financial bubbles, currency crises and sovereign defaults. of the financial crisis Causes and Consequences Financial bubbles are usually associated with easy credit, excessive leverage, speculation, greed, fraud and corruption. Easy credit led to a lack of adequate market discipline, which in turn causes excessive and imprudent lending. Causes of financial crisis Description Risk/Consequence Leverage Borrowing to finance investment Bubble that leads to bankruptcy Asset-liability mismatch The disparity between a bank’s deposits and its long term assets leads to the inability of banks to renew short term debt they used to finance long term investments in mortgage securities Bank runs Regulatory failure Improper (insufficient/excessive) regulatory control: -Insufficient regulation: 1) Results in failure of making institutions‟ financial situation publicly known (lack of transparency) 2) Makes it possible for financial institutions to operate without having...
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...Financial markets development and bank risk: Experience from Thailand during 1990–2012 1. Introduction a) Origion of concept: The longitudinal study aims to understand the impact of the evolution of financial markets development bank behavior. The focus on Thailand during the period 1990–2012 b) Theoritical background: captures the events surroundingthe Asian financial crisis of 1997–19982and the global financial crisis of 2007–2009. c) Significance/ Importance: Several studies have highlighted the benefits and costs of financial markets development. Essentially, financial markets development is thought to lead to economic growth by providing firms with better access to financing, thereby promoting domestic investments. Financial markets development (e.g., changes in bank regulations) can also affect the way in which banks operate and behave which, in turn, may have either positive or negative ramifications for the health of the banking system and the stability of thefinancial system. d) Research objective: This paper adds to the literature by analyzing the changes in financial markets development and the changes in capitalization ratios of commercial banks in Thailand over the period 1990–2012. e) Research question/ Problem statement: During this period, there were two major financial crises – the Asian financial crisis of 1997–1998 and the global financial crisis of 2007–2009 – both of which directly affected emerging market countries. While the former mainly...
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...countries financial history (about bank crisis, currency crashes and so on) and how these countries survived in different times. Furthermore, before I bought this book, I read the brief of the book it sounded interesting, than I wanted to read and to know more about it. Author’s credentials Carmen M. Reinhart is the Dennis Weatherstone Senior Fellow at the Peterson Institute for International Economics. Previously she was professor of economics at the University of Maryland. She has held a positions in IMF. Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy and professor of economics at Harvard University. He received his PhD in Economics from MIT. He is a commentator for NPR, the Wall Street Journal. And the Financial Times. Carmen M. Reinhart and Kenneth S. Rogoff made a big contribution to financial history, collected data which covered sixty-six countries and different time periods and wrote about financial crisis, inflation,international debt currency crashes and debasements. They are first researches in the history about the financial crisis over many years. The author’s were trying to explain in the book, that ‘This Time is Different’ syndrome is wrong that financial crisis is happening to other countries not to us, because we are doing better as we learn from the past. Summary At the beginning of the book authors is introducing with various crisis and their dates. In the first chapter there are explanations, and definitions, concepts which are...
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...the crisis. • You are required to use at least two organizational theories and/or concepts from the pensum to motivate your answer, making sure that you make a clear reference to them in your answer and within the literature list that is to be included at the end of your assignment. It is recommended that you focus on explaining a few possible causes in detail instead of discussing ten superficially. • You are required to select relevant data to produce justified answers to the research question relating such data to the theory and concepts selected. Sources of data can include newspapers, annual reports, statistical databases, websites, etc. Make sure that you make a clear reference to the data sources in your answer and in the reference list that is to be included at the end of your assignment. • Note that the level of analysis that you can use is quite open. For example, you might choose to see it from an inter-organizational perspective, from a field level (i.e. industry level) or from the perspective of an individual organization. It is recommended, however that you are very clear on the level that you are choosing. • Finally, note that you may want to use the literature, videos and presentations used during the Case Days as a starting point. A list of resources used to build the Global Financial Case in class is uploaded in Sitescape, for your inspiration. What caused the Global finansial crisis in 2008? Introduction What caused the Global Finansial Crisis in 2008...
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...Islamic Finance is a financial system that doesn’t work like other conventional banking systems. It follows the Islamic law, Shariah, which doesn’t allow certain aspects of a normal banking system such as usury and speculation. There are some main principles to be followed in Islamic banking. First of all, it prohibits interest, or Riba. Riba is forbidden in Islam, and therefore Islamic banking system adopts the principle of profit and loss sharing. It also prohibits uncertainty, gambling, and prohibits certain products and industries such as alcohol and tobacco. Islamic Finance needs to be in accordance with the Shariah. All products and contracts follow Islamic principles that conventional financial systems do not, such as interest and risk sharing, and uncertainty. Conventional financial systems have never worked this way and it worked for them for many years until they were hit by the financial crisis. The crisis had a minimal impact on the Islamic financial systems because they did not comply with all the factors that created the crisis in the first place. There were 3 main factors in the creation of the financial crises. First, subprime loans, which was lending to certain people who did not have a good credit history and were bound to default. The banks than charged them with higher rates that increased their risk of defaulting. Secondly, there was securitization, which was creating securities from un-liquid assets. This process is used by banks to create securities from...
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...Introduction The concept of global financial crisis (GFC) is not concept that has emerged recently. In fact, GFC dates back to the period of Great Depression in the 1930’s changing the perception that market failures and other economic factors affect the way businesses operate. The global financial crisis (GFC) of 2007-2009 resulted due to risky lending and increased loan defaults especially in the housing sector. A significant number of questions rose about the stability and policies that regulated the market. Among the many attributes of the market, major factors that contributed to the downfall relates to macroeconomic trends, market failures and regulatory failures. While several years have passed since the occurrence of the crisis, the United States of America is still recovering from events that saw the collapse of Bear Stearns, a mortgage under-writer in US 2007, Lehman Brothers (2008) and the near collapse of AIG Insurance. It is believed that the GFC of 2007 was the worst financial crisis of recent times. The US market plunged right into the recessionary periods and large multi-national companies struggled to keep up with the market conditions. Also known as, the burst of the financial bubble, governments realized the lack of regulations to control the market. These regulations related to accounting policies, auditing policies and more stringent rules as responses to major corporate collapses and upheavals in the financial sector. The introduction of Sarbanes-Oxley...
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