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Islamic Finance Essay

2537 words - 11 pages

 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 ...view middle of the document...

-Creating financial assets without any real economic activity
-Extreme economic greed overrides basic ethical consideration in investments
Subprime mortgage crisis

Contagion Where the failure of one particular financial institution to meet its financial obligations (due to lack of liquidity, bad loans or a sudden withdrawal of savings) causes other financial institutions to be unable to meet their financial obligations when due. Such a failure may cause damage to many other institutions and threatens the stability of financial markets Systemic risk
Money supply Uncontrolled printing of paper money that is not backed by real assist/commodity (gold) Higher inflation

 Causes of the U.S. subprime crisis
Banks have adopted an approach easy loans to get a bigger piece of the cake. Chapra (2009) points out: "the volume of loans acquired a higher priority on loan quality". Several factors contributed directly or indirectly to the occurrence and extent of the current credit crisis.:
• The derivatives and excessive leverage of financial institutions in the U.S.
• The complexity of credit derivative.
• Misapplication of inadequate regulatory systems and hollow on the lending standards.
• The borrowers have been making payments until they cease and the system, in fact, sold in.


The current crisis has emerged due to start until 2007, there was a boom in the U.S. hold the home-loan. Financial institutions ran to the supply of internal loans on competitive interest rates, often necessary conditions for granting the credit, and the creation of subprime loans. To refinance these loans, they were sold to factoring organizations which in turn securitized the general public. A mathematical technique was invented for subprime loans in the pool software called "collateralized debt obligations" (CDOs). It was argued that the pooling of these debt securities in a mathematical magic, eroding their risk to a great extent. Rating agencies have been made to believe in this magic formula to evaluate them as AAA for which they were paid triple their usual fees. These securitized as CDOs were then cut and exported worldwide. The invention of this new methodology called CDOs Wall Street CDO to create new low-rated corporate bonds and emerging markets debt alongside the sub-prime mortgages. Once exhausted the available debt CDOs, derivatives in the form of credit default swaps (CDS) entered the scene. In 2008, the credit default swaps market increased to 60 billion dollars, while worldwide gross domestic product was $ 60 trillion. During the same time, the size of derivatives markets on the whole (ie including options, futures, swaps, etc.) increased by $ 55 trillion of notional amount, in mid-1990 a staggering $ 600 trillion. Since all these derivatives were not regulated, no one could guess who said that.
When home prices fell in these circumstances, the obligor of default loans and foreclosures are not sufficient to recover the dues,...

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