Sample Essay

Since the current architecture of the conventional financial system has existed for a long time, it may perhaps be too much to expect the international community to undertake a radical structural reform of the kind that the Islamic financial system envisages. However, the adoption of some of the elements of the Islamic system, which are also a part of the Western heritage, is indispensable for ensuring the health and stability of the global financial system. (Khan, 2008)

Islamic Banking is still in its infancy and shares a very small proportion of international Banking. The use of equity and PLS is still very small while that of debt-creating modes is preponderant. The system is, thus, not fully prepared at present to play a significant role in ensuring the health and stability of the international financial system. It is, however, expected that the system will gradually gain momentum with the passage of time and complement the efforts now being made internationally for promoting the health and stability of the global financial system.

Islamic banks were able to shield themselves from the current global financial crisis mostly due to the fact that their operations are based on the principles of Islamic Banking. Islamic Banking not only prohibits interest (riba) based transactions but also prohibits transactions with excessive uncertainty (Gharar). MBS and other derivatives based on subprime loans are highly risky investments that resulted in substantial losses to conventional banks, particularly in the Western world. These securities are sold worldwide. Their riskiness is evident from the complex nature of these securities and difficulty in their valuation. Lack of regulation on derivatives and reckless behavior of conventional financial institutions have magnified the problem.

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