Mapping the Risks and Risk Management Practices in Islamic Banking

CHAPTER 5Islamic Banking and the Financial Crisis

Clearly, the crisis is dire. The situation is deteriorating, and it demands urgent and immediate action

—Barack Obama, on the economic crisis (2009)

There has been great optimism about the resilience of Islamic finance over the past few years due to the failures witnessed in the conventional financial world; this is, however, based on prejudice rather than proper analysis. Although this optimism has faded out recently, it still exists to a lesser degree. Immediately following the outbreak of the credit crisis in the West, advocates of Islamic finance filled stages and conferences with long emotional speeches on topics like: ‘the resilience of the Islamic financial industry’, ‘Islamic banking is recession-proof’, ‘Islamic finance could have saved the world’, etc. In such emotional discourses it is forgotten that modern Islamic financial institutions (IFIs) have been deviating from the foundational principles and aspirations of Islamic moral economy for some time now – principles which could, to a certain degree, provide some resilience against crisis. In theory, the Islamic finance world is definitely more resilient to economic shocks than the flawed Wall Street model, but unfortunately theory is a long way from fact in current financial practice, as practitioners of Islamic finance to date have been mimicking conventional products. This mimicking has resulted in a close correlation between the two systems.

However, it is evident ...