...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...
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... 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 leverage, speculation, greed, fraud and corruption. Easy credit led to a lack of adequate market discipline, which in turn causes excessive and imprudent lending. Causes of financial crisis Description Risk/Consequence Leverage Borrowing to finance investment Bubble that leads to bankruptcy Asset-liability mismatch The disparity between a bank’s deposits and its long term assets leads to the inability of banks to renew short term debt they used to finance long term investments in mortgage securities Bank runs Regulatory failure Improper (insufficient/excessive) regulatory control: -Insufficient regulation: 1) Results in failure of making institutions‟ financial situation publicly known (lack of transparency) 2) Makes it possible for financial institutions to operate without having...
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...The Financial Crises in Russia and East Asia: How the World Bank can Help. 1 - Overview of Asian financial crisis On July 2, 1997, the Government of Thailand abandoned its efforts to maintain a fixed- exchange rate – the Baht had been pegged to a basket of currencies dominated by the U.S. dollar – and allowed the Baht to float. This Baht quickly depreciated, falling 18% on the first day alone. The collapse of the Thai Baht was followed by speculative attacks on other countries’ currencies (including the Indonesian Rupiah, the Malaysia Ringitt, the Philippine Peso, and the Korean Won) and to a further round of forced devaluations. The collapse of fixed exchange rates was accompanied by a series of more general financial sector crises in several of these countries. Although the precise details vary, the immediate cause appears to be a mismatch between assets and liabilities in the corporate and banking sectors (in both currency and term length) and a sharp decline in asset values. These immediate problems were exacerbated by general financial sector weakness due to inadequate supervision and rampant insider lending. In many ways the crises in Asia were somewhat different than previously observed exchange rate crises. Corsetti, Pesenti and Roubini (1998) note that several of the usual indicators of a pending financial crisis – slow growth, large fiscal deficits, high rates of inflation and low savings and investment rates – were not observed in these...
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...India and the Global Financial Crisis What Have We Learnt? 1 - Duvvuri Subbarao _________________________________________________________ Thank you for inviting me to deliver the 2011 K R Narayanan Oration. It is an honour to which I attach a lot of value. President Narayanan 2. Late President Narayanan was a distinguished diplomat, a reputed parliamentarian, a capable minister and above all an erudite scholar. Born at the very bottom of India’s social pyramid, he rose on to occupy the highest office in the country with no assets other than hard work, integrity and humility. ‘A working President’, as he described himself, he never allowed dogma to overwhelm his beliefs and convictions. 3. President Narayanan was in office from 1997 to 2002, a time when globalization, as we are experiencing it in the current times, was taking root. At the banquet he hosted for the visiting US President Bill Clinton in New Delhi in March 2000, President Narayanan remarked: “Mr. President, we do recognise and welcome the fact that the world has been moving inevitably towards a one-world... But, for us, globalization does not mean the end of history and geography, and of the lively and exciting diversities of the world.” This was a thoughtful remark. As much as globalization may be inevitable, history and geography need not be destiny. If we learn the lessons of experience, we will not repeat the same mistakes. This indeed is the topic for my 1 K.R. Narayanan Oration by Dr. Duvvuri...
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...head: CAUSE OF ECONOMIC CONDITIONS IN THE UNITED STATES AND THE UNETHICAL BUSINESS THAT LED TO IT Final Paper James Smith Hodges University GEB/PAD 6376 Dr. Forrer Week Due: 14 Due: 08/14/2011 Submitted: 08/10/2011 INTRODUCTION (Part 1) Why has the unemployment rate been above 12 percent for the last several years? Why have so many prior successful businesses closed in the last four years? Why have so many major corporations and publicly traded companies filed for bankruptcy? Why did a house that used to cost $200,000.00 just sell for $40,000.00? Why are foreclosures at the highest rate in US history? Maybe the question to ask is what has caused all of this? There are so many questions to be answered when it comes to the economic conditions in the United States. How did it get into the current condition? What were the signs of slipping into the crisis (economic indicators)? Whose actions were responsible? Was the responsible party also guilty of unethical behavior (big issue) or was it accidental. How long will it take for the economy to get back to being productive? In the past, America has been a very productive, successful country. There have been other recessions and a depression that have affected the U.S. but for some reason this current crisis was started by a completely different chain of events. What was the chain of events that triggered this current catastrophe...
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...The ECB’s monetary policy in the crisis * In 1763, Amsterdam was the centre of a deep financial crisis. Highly leveraged investors were faced with a situation of falling asset prices. The liquidity crisis became severe and Amsterdam bank houses went bankrupt. * Similarly liquidity was an issue in the modern day financial crisis. Money markets seized up and several market participants found themselves unable to roll-over funding positions. * Finally, at the beginning of 2010 the latest turn: several euro area countries’ debt and deficit levels were found to be unsustainable. * Differently from the crisis in 1763, the determined actions of central banks prevented deleveraging, fire sales and ultimately deflation. * The ECB, and indeed all major central banks, reduced its policy rates to unprecedented lows and implemented various measures to restore monetary policy transmission to support credit flows to the real economy. * Liquidity support gives banks unlimited access to central bank money at a fixed price against adequate collateral for banks to liquefy their assets at times of stress by expanding the set of eligible assets used as collateral. * Also extending the maturity of lending so that the longest maturity of our long-term refinancing operations (LTROs) has been raised from the standard 3 months before the crisis to 6 months after. * The Outright Monetary Transactions (OMTs), eliminate the pricing of un-warranted tail risks in the bond...
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...aftermath of the financial crisis of 2007, there has been a great deal of debate regarding the key underlying causes. For example, when people discuss the collapse of the financial markets, the most frequently mentioned word is subprime mortgagewhich is considered as the culprit of the crisis. Yet, is subprime mortgage the root of the crisis? If it was, then the question would be how this type of financial product, which is only marginal part of the financial market, could cause such a catastrophic crisis. Specifically, systemic risk was developed. Essentially, subprime mortgage is a mere part of superficial reasons of the crisis and was induced by other underlying factors which will be discussed in the essay. Due to the current situation, it is necessary to correct such misunderstandings. According to the statistics issued by the National Bureau of Statistics of China, GDP growth rate of China has dropped from nearly 12 per cent three years ago to a more subdued 7.5 per cent in the second quarter. Despite a year and a half of recession, Euro zone’s GDP rose at an annualised rate of 1.1 per cent in the second quarter, this pickup still leaves GDP across the Euro area 0.7 per cent lower than a year ago (The Economist, 2013). This essay will argue that in order to resolve the current economic problems it is crucial to identify the underlying causes rather than accepting superficial reasons. It will also be argued that there are three key reasons for the crisis: monetary policy...
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...The current issue and full text archive of this journal is available at www.emeraldinsight.com/1742-2043.htm CPOIB 5,1/2 Wrong assumptions in the financial crisis Manuel B. Aalbers Amsterdam Institute for Metropolitan and International Development Studies, University of Amsterdam, Amsterdam, The Netherlands Abstract Purpose – The purpose of this paper is to show how some of the assumptions about the current financial crisis are wrong because they misunderstand what takes place in the mortgage market. Design/methodology/approach – The paper discusses four wrong assumptions: one related to regulation, one to leveraging, one to subprime lending and one to predatory lending. It briefly discusses some policy implications. Findings – The role of the state in the mortgage market is more complex than suggested by those who blame the state for not doing anything. The concept of leveraging can explain, at least in part, why the losses in financial markets are bigger than the losses in the housing market. Many subprime loans were sold to prime borrowers. Subprime lending was not designed to increase homeownership rates, but to fuel profits by exploiting vulnerable borrowers. Practical implications – It is too easy to argue that everyone made mistakes; most borrowers cannot be blamed for being sold risky, overpriced loans. A rescue plan is needed for defaulting borrowers and those already in foreclosure. Originality/value – The paper does not present new research, but brings together...
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...Real Property II – PLA 2612 October 10, 2013 How did the Securitization of Loans Contribute to the Housing Crisis? “Worm or beetle - drought or tempest - on a farmer's land may fall, Each is loaded full o' ruin, but a mortgage beats 'em all” (Will Carleton 1845-1912). A mortgage is the greatest investment the average individual will make in their entire life-time. However, according to today’s standards, the true magic of a mortgage is not when one signs the note and mortgage but what the lender does with it after it has been conveyed. In almost every case after a mortgage is signed, it is almost immediately sold to the secondary market, this is where the loans become securitized. This is where most Americans believe is the root of our current housing crisis. This paper will analyze (1) why most Americans believe that loan securitization is the reason why we are in a housing crisis. (2) How lax screening processes by lenders played a part (3) Risky lending practices and (4) finally, the opposing views on securitization and our current crisis. Why do most Americas believe loan securitization is the problem? In most cases, when we can’t laugh at our mistakes, we have already started looking for someone to blame. In the case of our current mortgage crisis, we have engaged in a myriad of who’s to blame. Some say the lenders failed to properly screen borrowers, while others say the government protected the secondary market as they bought and sold one bad note after another...
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...| Has Market Economy approach led the world to the current economic situation? | | | | By:Divya Padmanabhan IES Management College and Research Centre Mumbai, India | Executive summary: “If war is God’s way of teaching geography to the world, recession is His way of teaching everyone a little economics”. The global financial crisis has questioned the efficacy of the existing institutional framework and forced us to rethink on how our financial systems are regulated. It has also posed an important question whether the root cause of this global crisis has been the highly praised ‘Open Market Approach’. The inter linkages in the global economy has ensured that no country remains isolated and unhindered by the crisis. With the economic crisis looming over the people at large, unemployment seems to be at all time high and the whole world having a pessimistic view of the future, capitalism seems to be at loss of reason for this crisis, let alone a find solution for it. There was a time when being a capitalist economy was a matter of pride and people were excited to be part of the “free” economy but somewhere down the line the excitement seemed to have vanished. What was thought to be an epitome of equality, turned out to be the cause of inequality. In an article by Joseph E. Stiglitz “Of the 1%, By the 1%, For the 1%”, 1 percent of the people in USA take nearly a quarter of the nation’s...
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...nt went through a period of deregulation. Deregulation is a reduction of government involvement and control within an industry. Did this deregulation lead to the 2008 financial crisis? This is a hot button topic that is highly debated and causes a great deal of controversy. The financial crisis of 2008, known as the Great Recession, impacted the entire country and practically every individual citizen. Many politicians, such as Speaker of the House Nancy Pelosi, look for an easy blame or a scapegoat, for example, the deregulation by the Bush Administration. Pelosi has been quoted saying " the Bush Administration's eight long years of failed deregulation policies have resulted in our nation's largest bailout ever, leaving the American taxpayers on the hook potentially for billions of dollars" (Gattuso). The issue with that statement is that the economic deregulation she speaks of did not take place during the Bush Administration, but many years prior and the laws of that time are not controversial in today’s economic situation. Rather more recent regulatory laws are to blame for the financial crisis of 2008. Why did we Regulate in the First Place? The Great Depression is unopposed when it comes to economic downfalls in the United States. The financial hardships that took place during the 1930s rocked this country to its core. But what caused this large scale economic collapse? The Great Depression produced a sweeping ...
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...1. The financial crisis of 2007/2008 and its impact on the UK and other economies Do you still feel vague about the causes and the effects of the financial crisis of 2007/8? Are you preparing for a job interview in either the private or public sector? The events of 2007/8 have shaped both the current UK commercial and business scene and are now having a massive effect on the public sector. Similar impacts are being felt across Europe and the wider world. Knowing a bit more about what happened might give you more confidence going into the interview! This leaflet will give you a basic understanding of the causes of the financial crisis of 2007/2008 and the impact which it had on the UK and other economies. Topics covered are: UK history which led up to the financial crisis The effect on mortgages The banks’ reaction The effect on the world market The effect on the UK market This leaflet concludes with self assessment questions. 1 National and International Issues The financial crisis of 2007/2008 and its impact on the UK and other economies What were the root causes of the crisis? The roots of the financial problems of the last two/three years can probably be traced back to the deregulation of financial markets in the US, the UK and the Western European economies that started in the 1970s and gathered pace in the early 1980s. Deregulation swept away many of the governmental/regulatory controls and freed up organisations to trade across a wider range of...
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...author or authors. Recent IFDPs are available on the Web at www.federalreserve.gov/pubs/ifdp/. Fighting Against Currency Depreciation, Macroeconomic Instability and Sudden Stops∗ Luis-Felipe Zanna† First Draft: October 2002 This Draft: November 2005 Abstract In this paper we show that in the aftermath of a crisis, a government that changes the nominal interest rate in response to currency depreciation can induce aggregate instability in the economy by generating self-fulfilling endogenous cycles. In particular if a government raises the interest rate proportionally more than an increase in currency depreciation then it induces self-fulfilling cyclical equilibria that are able to replicate some of the empirical regularities of emerging market crises. We construct an equilibrium characterized by the self-validation of people’s expectations about currency depreciation and by the following stylized facts of the “Sudden Stop” phenomenon: a decline in domestic production and aggregate demand, a significantly larger currency depreciation, a collapse in asset prices, a sharp correction in the price of traded goods relative to non-traded goods and an improvement in the current account deficit. Keywords: Small Open Economy, Interest Rate Rules, Currency Depreciation, Multiple Equilibria, Sudden Stops, Collateral Constraints. JEL Classifications:...
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...Global Financial Crisis The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns. A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world. Furthermore, other weaknesses in the global financial system have surfaced. Some financial products and instruments have become so complex and twisted, that as things start to unravel, trust in the whole system started to fail. The subprime crisis came about in large part because of financial instruments such as securitization where banks would pool their various loans into sellable assets, thus off-loading risky loans onto others. (For banks, millions can be made in money-earning loans, but they are tied up for...
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...since the existing economic crisis play a part in impacting ATLAM financial position. Now, the management of ATLAM, a wholly owned organization of MICT Berhad, had been asked to upgrade its accounting system with the PETRA group-wide SAP system as to meet PETRA group service and time quality requirement. But with the current financial position and culture of ATLAM staff style of working urged the ATLAM management to think carefully and critically to ensure the best possible outcome for the organization. PROBLEMS: 1) Financial position of ATLAM was in fiscal deficit during the year 2001. Incoming cash flow of ATLAM is much lower than the outgoing cash flow. Root cause: Higher expenses on operational cost and implementation cost SAP; such as software cost, SAP license cost and customization cost for each financial report). Year 2001: SAP implementation cost: RM 5000000 -Request for each customization report (going to cost about RM 10,000 per report). -SAP software cost: RM -IT Software for licensing (SAP): 1000000 Suggested solution: To implement of SAP completely in ATLAM, ATLAM management representative should consider negotiating with SAP management representative; in order to reduce the cost of license and customization. By this way, ATLAM will be able to implement SAP completely as urged by PETRA groups, and at the same time, it able to help ATLAM to reduce their high expenses in term of (operational cost) company financial cash flow and able to increase...
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