The role of the Islamic banking system in reducing financial crises

Nadri, Kamran; Qelich, Wahhab; Meisami, Hossein

The role of the Islamic banking system in reducing financial crises

Authors

¹ Professor of economics, Imam Sadiq University (I.S.U.)

² Ph.D. Student in Financial Management, Alameh Tabatabae University, Tehran, Iran, and master of economics at the research institute for monetary and banking

³ Ph.D. Student in Economics, Imam Sadiq University (I.S.U.), and Researcher of the Islamic banking division, the monetary and banking research institute academy (MBRI)

Abstract

This paper tries to evaluate the bases of the conventional financial system which enhance the possibility of financial crises occurrence and to shed light on the potentials of the Islamic banking system to avoid such crises. It distinguishes between the reasons which lead to economic crises and classifies them into those leading to the occurrence of financial crises (vulnerability) and those affecting the continuity of these kinds of economic crises (instability). It tries to show the role of the Islamic banking system in smoothing both kinds of reasons hence decreasing the financial crises itself. The crises reasons in the area of vulnerability (occurrence of problem) are: the fact that payable funds are not simultaneous with receivable funds, the incorrect development of speculation, the expansion of the unreal parts of the economies, the massive movement of capital, the lack of transparency, supervision and control over the economic activities. In addition, at least two factors affect instability (the continuity of) financial crises which are: Strategic Complementarities Principle and Contagion Principle. The results of this research show that in comparison with conventional banking system, the Islamic banking system has the potentials to avoid probable financial crises.

Keywords