Can Islamic Finance possibly avoid a sub prime crisis? In a nutshell the explanation to the present day economic problem lies in its core principles of Islamic finance……
For example, by using the maqasid (purpose of the law) approach, which is one of the of the core elements of the Shari’ah, the stakeholders of the Islamic financial system, particularly the practitioners, are supposed to assess the positive (manfa’ah) and negative (madarrah) aspects of their operations, systems, products and all matters related to the provision of Islamic financial services. This is because the goal of the maqasid approach is to secure benefits and prevent harm.
By adopting the maqasid approach, Islamic financial institutions will avoid granting financing to subprime customers, as was done by the conventional banks, which ultimately led to the said crisis. This is because the madarrah of approving financing to subprime customers is more than the manfa’ah. Hence, financial turmoils like the subprime crisis can be avoided, proving that Shari’ah can lead to better risk management.
In the end, it depends on the actual practice of the Islamic banking sector. If the Shari’ah is seen as the an inhibitor that stops the banks from reaping quick gains, then the result would be crisis, after crisis, after crisis, with the current crisis being worse than the preceding one. However, if the Shari’ah is seen as an enabler, then financial turmoils can be avoided, leading to a more robust and resilient Islamic financial system