THE SUBPRIME MORTGAGE CRISIS: ISLAMIC ECONOMICS PERSPECTIVE

Abstract

The bursting of the housing bubble forced banks to write down several hundred billion dollars in bad loans caused by mortgage delinquencies. Two trends in the banking industry contributed significantly to the lending boom and housing frenzy that laid the foundations for the crisis. First, instead of holding loans on banks‘ balance sheets, banks moved to an–originate and distribute model. Second, banks increasingly financed their asset holdings with shorter maturity instruments. This left banks particularly exposed to a dry-up in funding liquidity. From Islamic economics point of view, no doubt, riba (interest, usury) and maysir (gambling, speculative activities similar to gambling) are the major factors leading to the current financial crisis. Keeping individuals and society free form financial and economic crises can clearly be seen as one of the objectives of such institutions. While the conventional financial system disintegrates, Islamic banking seems to be flourishing, accounting for 17 percent of Qatari and 15 percent of Malaysian banking assets and impressively, over 95 percent of banking activity in Saudi.