How Islamic Finance can affect the Financial Stability?

Abstract

The subprime mortage crisis during the years 2007-2010 demonstrated the weaknesses of the conventional system of finance. The inherent speculative element of this system, which is fueled through the logic of interest additionally, brought attention to alternative approaches in order to recover control over the financial system. Islamic finance, a system relatively young in practice, contributed its part to the ongoing discussion on financial stability and has to present its own tools for this huge task. This paper wants to outline the ongoing theoretical discussion and empirical evidence concerning the question of financial stability and the role of Islamic finance in it. Main results found was Islamic finance has contributed to the overall financial stability. The survival of this financial system through the crisis of 2007-2008 has made it more and more interesting to investigate and to develop. The question of tradeoff between stability and profitability of this financial system remains under investigation as the conventional financial sector continues to be more profitable but less stable. The new avenue of the research channel in the financial sector could measure this tradeoff taking into account the future challenges.