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Islamic Finance: a Therapy for Healing the Global Financial Crisis

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Islamic Finance: A Therapy for Healing the Global Financial Crisis

Miranti Kartika Dewi 1 *Researcher of Centre for Islamic Economics and Business ** Lecturer of Department of Accounting Faculty of Economics, University of Indonesia

Ilham Reza Ferdian * Student of Master of Science on Finance Programme Kuliyyah of Economics and Management Sciences International Islamic University Malaysia ** Fellow of PT. Bank Muamalat Indonesia

ABSTRACT Global financial crisis which hit many too-big-too-fail countries and financial institution in the world was mainly made happen by debt securitization. Derivative instruments resulted from this process obviously were not backed by real asset. When any party came up with investment on these instruments, the investment would never support the development of real sector economy, instead, it just worsen the situation by creating bubble economic. This condition becomes more harmful when the securitized debts default. This practice is strictly forbidden according to Islamic finance principles. It has inherent risk management tools to prevent the crisis. This paper attempts to examine the root of the financial crisis and find the solution from Islamic finance principles.

Keywords: Financial crisis, Derivative, MBS, CDO, CDS, Islamic finance

1

Corresponding author can be contacted by email: miranti_k_dewi@yahoo.com.

“The credit and capital markets have grown too rapidly, with too little transparency and accountability. Prepare for an explosion that will rock the western financial system to its foundations.” (Barberton and Lane (1999)

INTRODUCTION As mentioned by Barberto and Lane (1999), the explosion just became a reality. Though the crises in the US and Europe were one of the crises series which regularly hit the world starting from the 20th century,

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