The downfall in the world financial system has given rise to intense questions about its radical flaws and its future prospects. There is a great concern to bring about reformations in the current monetary system. Deleveraging is the name, given 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 prices in the market as more assets are dumped in it. This situation accelerates deleveraging. Once this hideous cycle starts it gets such a momentum that even huge monetary back up fails to hold it back.
The economic mangers, in addition to their good governance, need to find out new ways to tackle such situations arise time to time. The executive education in economics, too, needs radical reformation in this perspective. Islamic finance can help solve such crisis.
One of the main causes of economic recession is when banks give out money as loan in excess, without much prudence, in hope to get fixed interest from their customers who take loans. By lending money the banks get an unrestrained opportunity to earn money out of money. Hence, they treat money as commodity, which should be treated as medium of exchange for goods and services according to Islamic finance. This accumulated money by the bank is further used in procurement of more money by giving out more loans and receiving money through interest.
It so happens that some people who take loans but their business flops or they fail to make good enough to pay back loan with interest, so they have to withdraw from their mortgage or let their property confiscated. Loss of money leads to loss of purchasing power. The market experiences an overall reduction in economic activities when people lose purchasing power.
On the other hand, those who take loan from banks and run their business with success, they charge on their products or services for the extra amount of interest, which they have to pay to banks. In this way they get it from their customers. This gives rise to inflation. Bank again succeeds in accumulating the money bubble to exploit through it further. This leads to overall recession in economic activities, though a few should prosper.
This was the main reason behind the financial crisis in the last decade according to economists. This was the result of the lack of good governance of current financial system. Prof John Gray of Oxford University calls it, “virtual financial economy” 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 money and finance system is not fair. It is ecologically destructive and economically inefficient. He raised concern about generating money out of money. According to him generation of money should be against real goods and services.