Financial Crisis and Capitalism: Solution in Islamic Finance

Abstract

The purpose of this paper is to focus on recent financial crisis and points out the various factors that have contributed to the crisis. It also articulates the need for Islamic banking and financial service industry to be better embedded in the reality of the real sector to achieve the broader economic goals. An in-depth analysis is made based on the information from secondary sources. The paper argues that capitalism is the main factor of the crisis. Some of the causes of the current financial crisis are due to excessive speculation and derivatives, debt finance, greed etc. leading to financial collapse and that then result in an economic recession in the western economies. This study used a qualitative approach and descriptive analysis. In the process, a descriptive analysis is described and analyzed for dissemination and implementation of analyses Islamic economics as a solution to the financial crisis. It then looks Islamic financial system to help solve the current financial crisis. A major factor behind the current financial is excessive debt finance and financial economy with a growing disconnect between the monetary and the real sector which are the main characteristics of the capitalistic system. Some proponents of the Islamic finance claim such financial crisis would have been avoided, if asset-backed Islamic finance were adopted. However, while Islamic finance in form and legality is asset backed at the micro-juristic level, it is still largely de-linked from real sector at the macro level.