The downfall in the globe financial program has given rise to intense queries about its radical flaws and its future prospects. There is a excellent concern to bring about reformations in the recent monetary system. Deleveraging is the name, provided to this downward spiral. It is the forced reduction of debt, accumulated by the households and the financial institutions. This leads to low drive of costs in the marketplace as much more assets are dumped in it. This situation accelerates deleveraging. Once this hideous cycle begins it gets such a momentum that even enormous monetary back up fails to hold it back.
The financial mangers, in addition to their excellent governance, want to locate out new ways to tackle such scenarios arise time to time. The executive education in economics, also, demands radical reformation in this viewpoint. Islamic finance can support resolve such crisis.
One particular of the main causes of economic recession is when banks give out income as loan in excess, without considerably prudence, in hope to get fixed interest from their buyers who take loans. By lending funds the banks get an unrestrained opportunity to earn cash out of funds. Hence, they treat income as commodity, which should be treated as medium of exchange for goods and services according to Islamic finance. This accumulated cash by the bank is further used in procurement of more funds by giving out much more loans and getting money via interest.
It so happens that some individuals who take loans but their organization flops or they fail to make excellent sufficient to spend back loan with interest, so they have to withdraw from their mortgage or let their property confiscated. Loss of income leads to loss of purchasing energy. The market experiences an all round reduction in economic activities when people lose buying energy.
On the other hand, these who take loan from banks and run their enterprise with good results, they charge on their merchandise or services for the added amount of interest, which they have to spend to banks. In this way they get it from their clients. This gives rise to inflation. Bank yet again succeeds in accumulating the money bubble to exploit by way of it further. This leads to all round recession in financial activities, even though a couple of must prosper.
This was the primary cause behind the economic crisis in the final decade according to economists. This was the result of the lack of of existing monetary method. Prof John Gray of Oxford University calls it, “virtual economic economic climate” that has enormous capability of disturbing the real finance as it was witnessed when Barings, the oldest of the Britain banks, went default in 1995. James Robertson is of the opinion that present cash and finance technique is not fair. It is ecologically destructive and economically inefficient. He raised concern about generating money out of funds. According to him generation of funds ought to be against true goods and solutions.
The remedy lies in the Islamic method of finance. But the foremost is the executive education requirements to be oriented to find out how to place it in appropriate practice. The funds is not a commodity, according to Islamic finance, but a medium of exchange for goods and services. When loan is to be taken, it can be provided as investment and creditor and the receiver of money can share the potential profit and loss. This way each parties will be partners in a joint venture and will generate actual funds out of exchange of goods and solutions.
This is what the Islamic finance method wants to establish in the economy. Islamic banking is distinguished in two methods:
It concentrates on the genuine goods and services.
It ensures just flow of money by profit and loss sharing
This gives fantastic stability to economy. Even if the economy enters into the recession the system based on profit and loss sharing helps safeguards the financial operators from accumulation of income via interest, therefore lessen the threat of bankruptcy and default.