Islamic Finance: An Alternative Financial System for Stability, Equity, and Growth

PSL Quarterly Review, Vol. 67, No. 268, pp. 9-54, anno 2014

46 Pages Posted: 19 Jun 2014

See all articles by Hossein Askari

Hossein Askari

George Washington University - Department of International Business

Noureddine Krichene

International Monetary Fund (IMF) - African Department

Date Written: March 15, 2014

Abstract

Conventional finance has long been plagued by crises that cause economic dislocations and impede sustained economic growth, with banks and non-bank financial institutions requiring periodic bailouts. Numerous developing countries have been unable to mobilise domestic and foreign financial resources for development while many advanced countries continue to be plagued by recurring financial crises. A number of eminent economists have denounced the shortfalls of conventional banking and have advocated 100% reserve banking as the stable foundation for a financial system, a recommendation that happens to coincide with the Islamic financial system. The Islamic financial system is characterised by a two-tier banking system with 100% reserve deposit system and risk-sharing equity or investment banking akin to a mutual fund, and the prohibition of interest and interest-based transactions. Islamic finance promotes risk sharing and an efficient risk-sharing vehicle would be a stock market that operates along Islamic principles that prohibit interest and interest-based leverage.

Keywords: Islamic finance, financial stability, interest, risk sharing

JEL Classification: P43, G15, Z12

Suggested Citation

Askari, Hossein and Krichene, Noureddine, Islamic Finance: An Alternative Financial System for Stability, Equity, and Growth (March 15, 2014). PSL Quarterly Review, Vol. 67, No. 268, pp. 9-54, anno 2014. Available at SSRN: https://ssrn.com/abstract=2456234

Hossein Askari (Contact Author)

George Washington University - Department of International Business ( email )

2023 G Street NW
Washington, DC 20052
United States

Noureddine Krichene

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

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