LESSONS LEARNED FROM REPEATED FINANCIAL CRISES: AN ISLAMIC ECONOMIC PERSPECTIVE
Abstract
Financial crises have been repeated again and again over a long period of time since the demise of gold regime in 1915, have been temporarily subsided in the period under Bretton Woods Agreement with gold standard in 1950-1972, and have been reemerged after the collapse of Bretton Woods Agreement with higher frequency and magnitude. The recent subprime mortgage crisis in the US has spread out throughout the world threatening global meltdown. It seems that the conventional world have not really learned the lessons and have handled the crisis only partially in the symptoms without touching the root cause of the crisis. This study tries to determine the anatomy and root causes of the crisis and layout strategies to cure it using analytic descriptive and quantitative approaches under Islamic perspectives.
The study concludes that the root causes of the crisis from Islamic economic perspective can be human error and natural phenomenon uncontrollable by human. Human error can be divided into three groups, namely (1) moral decadences that trigger (2) system or conceptual flaws and (3) internal weaknesses. Conceptual system flaws include 1) excess money supply from seigniorage, fractional reserve banking system, credit card and derivatives; 2) Speculation; 3) interest system; 4) international monetary system; and 5) real and monetary sectors decoupling.
Empirical results show that riba rooted causes of financial crises (excess money supply 2.8%, interest rate 45.2%, and exchange rate 18.6%) give 66.6% share to financial crises in Indonesia, while if we substitute these three systems according to Islamic perspective (just money supply 0.7%, PLS return 2.5%, and single global currency 0.2%) will give only 3.4% share to financial crises in Indonesia, or a massive reduction of 63.2%.
JEL Classification: E44, E51, G21
Keywords: Financial Crisis, Fiat Money, Fractional Reserve, Interest, Speculation, Narrow Banking, Profit-and-Loss Sharing, Single Global Currency.
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References
A. Conventional Economic Literatures
Batunanggar, Sukarela. 2002. “Indonesia’s Banking Crisis Resolution: Lessons and the Way Forward.” Bank Indonesia Working PaperWP/12/2002. Jakarta: Bank Indonesia.
Barro, Robert J. 2001. “Economic Growth in East Asia before and after the Crisis. “NBER Working Paperno.8330. Cambridge, Mass.: National Bureau of Economic Research.
Caprio, Gerard and Daniela Klingelbiel. 1996. “Bank Insolvencies: Cross Country Experience.” Policy Research Working Papers no.1620. Washington, DC: World Bank, Policy and Research Department.
Caprio, Gerard, and Daniela Klingebiel, 2002. “Episodes of Systemic and Borderline Banking Crises.” In Managing the Real and Fiscal Effects of Banking Crises, edited by Daniela Klingebiel and Luc Laeven. World Bank Discussion Paper no. 428, 31√49. Washington, D.C.: World Bank.
Caprio, Gerard, Daniela Klingebiel, Luc Laeven, and Guillermo Noguera. 2005. “Banking Crisis Database.” In Systemic Financial Distress: Containment and Resolution, edited by Patrick Honohan and Luc Laeven. Cambridge University Press.
Caprio, Gerard, James A. Hanson, and Robert E. Litan (ed.). 2005. Financial Crises: Lessons from the Past, Preparation for the Future. Brookings Institution Press, Washington, D.C.
Caprio, Gerard, Asli Demirguc-Kunt, Edward J. Kane. 2008. “The 2007 Meltdown in Structured Securitization.” Policy Research Working Paper no.4756. Washington, D.C.: World Bank, Development Research Group.
Chailloux, Alexandre, Simon Gray, Ulrich Kluh, Seiichi Shimizu, and Peter Stella. 2008. “Central Bank Response to the 2007√08 Financial Market Turbulence: Experiences and Lessons Drawn.” IMF Working PaperWP/08/210. Washington, D.C.: International Monetary Fund.
Claessens, Stijn, Daniela Klingebiel, and Luc Laeven. 2004. “Resolving Systemic Financial Crises: Policies and Institutions.” Policy Research Paper. Washington: World Bank.
Davies, Roy and Glyn Davies. 1996. A History of Money from Ancient Times to the Present Day, Univesity of Wales Press.
Development Research Group. 2008. “Lessons from World Bank Research on Financial Crises.” Policy Research Working Paper no.4779. Washington, D.C.: World Bank, Development Research Group.
Dooley, Michael. 2000. “A Model of Crises in Emerging Markets.” Economic Journal 110, no. 460: 256-73.
Dooley, Michael, David Folkerts-Landau, and Peter Garber. 2003. “An Essay on the Revived Bretton Woods System,” NBER Working Paper no.9971. Cambridge, Mass.: National Bureau of Economic Research.
Eichengreen, Barry. 2004. “Global Imbalances and the Lessons of Bretton Woods.” NBER Working Paperno.10497. Cambridge, Mass.: National Bureau of Economic Research, May.
Ergungor, O. Emre and James B. Thomson. 2005. “Systemic Banking Crises.” Policy Discussion Papers. Federal Reserve Bank of Cleveland.
Goldstein, Morris. 2005. “The Next Emerging-Market Financial Crisis: What Might It Look Like?” In Financial Crises: Lessons from the Past, Preparation for the Future, edited by Gerard Caprio, James A. Hanson, and Robert E. Litan. Brookings Institution Press.
Hanson, James A. 2005. “Postcrisis Challenges and Risk in East Asia and Latin America: Where Do They Go from Here?.” In Financial Crises: Lessons from the Past, Preparation for the Future, edited by Gerard Caprio, James A. Hanson, and Robert E. Litan. Brookings Institution Press.
Kaminsky, Graciela, and Carmen Reinhart. 1999. “The Twin Crises: The Causes of Banking and Balance of Payments Problems.” American Economic Review 89, no. 3: 473-500.
Kaminsky, Graciela L., Carmen M. Reinhart, and Carlos A. Vegh. 2003. “The Unholy Trinity of Financial Contagion.” NBER Working Paper no.10061. Cambridge, Mass.: National Bureau of Economic Research.
Kenward, Lloyd. 2002. From the Trenches, The First Year of Indonesia's Crisis 1997/98 as Seen from the World Bank’s Office in Jakarta. Jakarta: Center for International and Strategic Studies.
Kindleberger, Charles P. 2000. Manias, Panics, and Crashes: A History of Financial Crises. New York: John Wiley.
Krugman, Paul. 1979. “A Model of Balance of Payments Crises.” Journal of Money, Credit, and Banking 11, no. 3: 311√25.
Laeven, Luc and Fabian Valencia. 2008. “Systemic Banking Crises: A New Database.” IMF Working PaperWP/08/224. Washington, D.C.: International Monetary Fund.
Lietaer, Bernard, Robert Ulanowicz, and Sally Goerner. 2008. “White Paper on the Options for Managing Systemic Bank Crises.” Mimeo.
Lindgren, Carl-John, Tomas J. T. Balino, Charles Enoch, Anne-Marie Gulde, Marc Quintyn, and
Leslie Teo. 1999. “Financial Crisis and Restructuring: Lessons from Asia.” Occasional Paper no.188. Washington, D.C.: International Monetary Fund.
Mussa, Michael. 2005. “Sustaining Global Growth while Reducing External Imbalances.” In The United States and the World Economy, edited by C. Fred Bergsten. Washington: Institute for International Economics.
Perry, Guillermo, and Luis Serven. 2003. “The Anatomy of a Multiple Crisis: Why Was Argentina Special and What Can We Learn from It?” Mimeo. Washington: World Bank.
Reinhart, Carmen M. and Kenneth S. Rogoff. 2008. “Is the 2007 US Sub-prime Financial Crisis So Different? An International Historical Comparison.” NBER Working Paper no.13761. Cambridge, Mass.: National Bureau of Economic Research.
Roubini, Nouriel, and Brad Setser. 2005. “Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006.” Paper written for the symposium “The Revived Bretton Woods System: A New Paradigm for Asian Development?” Federal Reserve Bank of San Francisco, San Francisco, February 4.
Yanuarti, Tri dan Akhis R. Hutabarat. 2006. “Perbandingan Determinan Inflasi Indonesia, Malaysia, Thailand dan Filipina.” Bank Indonesia Working Paper WP/05/2006. Jakarta: Bank Indonesia.
B. Islamic Economic Literatures
Al-Jarhi, Mabid Ali. 2004. “Remedy for Banking Crises: What Chicago and Islam Have In Common: A Comment.” Islamic Economic Studies vol.11 no.2. Jeddah, Saudi Arabia: Islamic Research and Training Institute.
Ali, Salman Syed. 2006/2007. “Financial Distress and Bank Failure: Lessons from Closure of Ihlas Finans in Turkey.” Islamic Economic Studies vol.14 no.1&2. Jeddah, Saudi Arabia: Islamic Research and Training Institute.
Ali, Salman Syed. 2007. “Financial Distress and Bank Failure: Relevance for Islamic Banks.” In Islamic Banking and Finance: Fundamentals and Contemporary Issues, edited by Salman Syed Ali and Ausaf Ahmad, Islamic Research and Training Institute - Universiti Brunei Darussalam, IRTI.
Ascarya. 2007. Akad dan Produk Bank Syariah. Jakarta, Indonesia: Rajawali Pers.
Ascarya, Ali Sakti, Noer A. Achsani, dan Diana Yumanita. 2008. “Towards Integrated Monetary Policy under Dual Financial System: Interest System vs. Profit-and-Loss Sharing System.” Paper. UII-UKM International Forum on Islamic Economics: International Workshop on Exploring Islamic Economic Theory, Islamic University of Indonesia,Yogyakarta, Indonesia, August 11-12.
Ascarya, Heni Hasanah, dan Noer A. Achsani. 2008. “Demand for Money and Monetary Stability under Dual Financial System in Indonesia.” Paper. USIM Third Islamic Banking, Accounting and Finance Conference 2008, “Financial Intelligence in Wealth Management. Islam Hadhari’s Perspectives,” Universiti Sains Islam Malaysia, Kuala Lumpur Malaysia, July 29-30.
Garcia, Valeriano F., Vicente Fretes Cibils, and Rodolfo Maino. 2004 “Remedy for Banking Crises: What Chicago and Islam Have In Common.” Islamic Economic Studies, vol.11 no.2. Jeddah, Saudi Arabia: Islamic Research and Training Institute.
Harahap, Sofyan S. 2008. “Ekonomi Syariah, Bretton Woods, KTT ASEM, dan AS.” Harian Republika3 November hal.6. Indonesia.
Hasan, Zubair. 2002. “The 1997-1998 Financial Crisis in Malaysia: Causes, Response, and Results.” Islamic Economic Studies, vol.9 no.2. Jeddah, Saudi Arabia: Islamic Research and Training Institute.
Hasan, Zubair. 2003. “The 1997-1998 Financial Crisis in Malaysia: Causes, Response, and Results - A Rejoinder.” Islamic Economic Studies, vol.10 no.2. Jeddah, Saudi Arabia: Islamic Research and Training Institute.
Idris, Handi R. 2008. “OKI, IDB Bersikaplah!” Harian Republika3 November hal.7. Indonesia.
Izhar, Hylmun. 2008. “Keuangan Syariah dan Krisis Ekonomi.” Harian Republika 3 November hal.6. Indonesia.
Rusydiana, Aam S. dan Ascarya. 2008. “Determinan Inflasi Indonesia: Perbandingan Pendekatan Islam dan Konvensional.” Mimeo.
Sakti, Ali. 2007. Sistem Ekonomi Islam: Jawaban atas Kekacauan Ekonomi Modern. Paradigma & Aqsa Publishing, Jakarta, Indonesia.
Sanrego, Yulizar D. dan Nuruddin Mhd. Ali. 2008. “Krisis Global dan Babak Baru Ekonomi Islam.” Mimeo.
Shodiq, Muhammad. 2008. “Ekonomi Syariah, Solusi Krisis Keuangan Global.” Harian Republika 24 November hal.6. Indonesia
Siddiqi, Muhammad N. 2008. “Current Financial Crisis and Islamic Economics.” Mimeo.
Thomas, Abdulkader. 2008. “Lessons Not to Learn.” Islamic Finance Asia October/November Edition
Batunanggar, Sukarela. 2002. “Indonesia’s Banking Crisis Resolution: Lessons and the Way Forward.” Bank Indonesia Working PaperWP/12/2002. Jakarta: Bank Indonesia.
Barro, Robert J. 2001. “Economic Growth in East Asia before and after the Crisis. “NBER Working Paperno.8330. Cambridge, Mass.: National Bureau of Economic Research.
Caprio, Gerard and Daniela Klingelbiel. 1996. “Bank Insolvencies: Cross Country Experience.” Policy Research Working Papers no.1620. Washington, DC: World Bank, Policy and Research Department.
Caprio, Gerard, and Daniela Klingebiel, 2002. “Episodes of Systemic and Borderline Banking Crises.” In Managing the Real and Fiscal Effects of Banking Crises, edited by Daniela Klingebiel and Luc Laeven. World Bank Discussion Paper no. 428, 31√49. Washington, D.C.: World Bank.
Caprio, Gerard, Daniela Klingebiel, Luc Laeven, and Guillermo Noguera. 2005. “Banking Crisis Database.” In Systemic Financial Distress: Containment and Resolution, edited by Patrick Honohan and Luc Laeven. Cambridge University Press.
Caprio, Gerard, James A. Hanson, and Robert E. Litan (ed.). 2005. Financial Crises: Lessons from the Past, Preparation for the Future. Brookings Institution Press, Washington, D.C.
Caprio, Gerard, Asli Demirguc-Kunt, Edward J. Kane. 2008. “The 2007 Meltdown in Structured Securitization.” Policy Research Working Paper no.4756. Washington, D.C.: World Bank, Development Research Group.
Chailloux, Alexandre, Simon Gray, Ulrich Kluh, Seiichi Shimizu, and Peter Stella. 2008. “Central Bank Response to the 2007√08 Financial Market Turbulence: Experiences and Lessons Drawn.” IMF Working PaperWP/08/210. Washington, D.C.: International Monetary Fund.
Claessens, Stijn, Daniela Klingebiel, and Luc Laeven. 2004. “Resolving Systemic Financial Crises: Policies and Institutions.” Policy Research Paper. Washington: World Bank.
Davies, Roy and Glyn Davies. 1996. A History of Money from Ancient Times to the Present Day, Univesity of Wales Press.
Development Research Group. 2008. “Lessons from World Bank Research on Financial Crises.” Policy Research Working Paper no.4779. Washington, D.C.: World Bank, Development Research Group.
Dooley, Michael. 2000. “A Model of Crises in Emerging Markets.” Economic Journal 110, no. 460: 256-73.
Dooley, Michael, David Folkerts-Landau, and Peter Garber. 2003. “An Essay on the Revived Bretton Woods System,” NBER Working Paper no.9971. Cambridge, Mass.: National Bureau of Economic Research.
Eichengreen, Barry. 2004. “Global Imbalances and the Lessons of Bretton Woods.” NBER Working Paperno.10497. Cambridge, Mass.: National Bureau of Economic Research, May.
Ergungor, O. Emre and James B. Thomson. 2005. “Systemic Banking Crises.” Policy Discussion Papers. Federal Reserve Bank of Cleveland.
Goldstein, Morris. 2005. “The Next Emerging-Market Financial Crisis: What Might It Look Like?” In Financial Crises: Lessons from the Past, Preparation for the Future, edited by Gerard Caprio, James A. Hanson, and Robert E. Litan. Brookings Institution Press.
Hanson, James A. 2005. “Postcrisis Challenges and Risk in East Asia and Latin America: Where Do They Go from Here?.” In Financial Crises: Lessons from the Past, Preparation for the Future, edited by Gerard Caprio, James A. Hanson, and Robert E. Litan. Brookings Institution Press.
Kaminsky, Graciela, and Carmen Reinhart. 1999. “The Twin Crises: The Causes of Banking and Balance of Payments Problems.” American Economic Review 89, no. 3: 473-500.
Kaminsky, Graciela L., Carmen M. Reinhart, and Carlos A. Vegh. 2003. “The Unholy Trinity of Financial Contagion.” NBER Working Paper no.10061. Cambridge, Mass.: National Bureau of Economic Research.
Kenward, Lloyd. 2002. From the Trenches, The First Year of Indonesia's Crisis 1997/98 as Seen from the World Bank’s Office in Jakarta. Jakarta: Center for International and Strategic Studies.
Kindleberger, Charles P. 2000. Manias, Panics, and Crashes: A History of Financial Crises. New York: John Wiley.
Krugman, Paul. 1979. “A Model of Balance of Payments Crises.” Journal of Money, Credit, and Banking 11, no. 3: 311√25.
Laeven, Luc and Fabian Valencia. 2008. “Systemic Banking Crises: A New Database.” IMF Working PaperWP/08/224. Washington, D.C.: International Monetary Fund.
Lietaer, Bernard, Robert Ulanowicz, and Sally Goerner. 2008. “White Paper on the Options for Managing Systemic Bank Crises.” Mimeo.
Lindgren, Carl-John, Tomas J. T. Balino, Charles Enoch, Anne-Marie Gulde, Marc Quintyn, and
Leslie Teo. 1999. “Financial Crisis and Restructuring: Lessons from Asia.” Occasional Paper no.188. Washington, D.C.: International Monetary Fund.
Mussa, Michael. 2005. “Sustaining Global Growth while Reducing External Imbalances.” In The United States and the World Economy, edited by C. Fred Bergsten. Washington: Institute for International Economics.
Perry, Guillermo, and Luis Serven. 2003. “The Anatomy of a Multiple Crisis: Why Was Argentina Special and What Can We Learn from It?” Mimeo. Washington: World Bank.
Reinhart, Carmen M. and Kenneth S. Rogoff. 2008. “Is the 2007 US Sub-prime Financial Crisis So Different? An International Historical Comparison.” NBER Working Paper no.13761. Cambridge, Mass.: National Bureau of Economic Research.
Roubini, Nouriel, and Brad Setser. 2005. “Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006.” Paper written for the symposium “The Revived Bretton Woods System: A New Paradigm for Asian Development?” Federal Reserve Bank of San Francisco, San Francisco, February 4.
Yanuarti, Tri dan Akhis R. Hutabarat. 2006. “Perbandingan Determinan Inflasi Indonesia, Malaysia, Thailand dan Filipina.” Bank Indonesia Working Paper WP/05/2006. Jakarta: Bank Indonesia.
B. Islamic Economic Literatures
Al-Jarhi, Mabid Ali. 2004. “Remedy for Banking Crises: What Chicago and Islam Have In Common: A Comment.” Islamic Economic Studies vol.11 no.2. Jeddah, Saudi Arabia: Islamic Research and Training Institute.
Ali, Salman Syed. 2006/2007. “Financial Distress and Bank Failure: Lessons from Closure of Ihlas Finans in Turkey.” Islamic Economic Studies vol.14 no.1&2. Jeddah, Saudi Arabia: Islamic Research and Training Institute.
Ali, Salman Syed. 2007. “Financial Distress and Bank Failure: Relevance for Islamic Banks.” In Islamic Banking and Finance: Fundamentals and Contemporary Issues, edited by Salman Syed Ali and Ausaf Ahmad, Islamic Research and Training Institute - Universiti Brunei Darussalam, IRTI.
Ascarya. 2007. Akad dan Produk Bank Syariah. Jakarta, Indonesia: Rajawali Pers.
Ascarya, Ali Sakti, Noer A. Achsani, dan Diana Yumanita. 2008. “Towards Integrated Monetary Policy under Dual Financial System: Interest System vs. Profit-and-Loss Sharing System.” Paper. UII-UKM International Forum on Islamic Economics: International Workshop on Exploring Islamic Economic Theory, Islamic University of Indonesia,Yogyakarta, Indonesia, August 11-12.
Ascarya, Heni Hasanah, dan Noer A. Achsani. 2008. “Demand for Money and Monetary Stability under Dual Financial System in Indonesia.” Paper. USIM Third Islamic Banking, Accounting and Finance Conference 2008, “Financial Intelligence in Wealth Management. Islam Hadhari’s Perspectives,” Universiti Sains Islam Malaysia, Kuala Lumpur Malaysia, July 29-30.
Garcia, Valeriano F., Vicente Fretes Cibils, and Rodolfo Maino. 2004 “Remedy for Banking Crises: What Chicago and Islam Have In Common.” Islamic Economic Studies, vol.11 no.2. Jeddah, Saudi Arabia: Islamic Research and Training Institute.
Harahap, Sofyan S. 2008. “Ekonomi Syariah, Bretton Woods, KTT ASEM, dan AS.” Harian Republika3 November hal.6. Indonesia.
Hasan, Zubair. 2002. “The 1997-1998 Financial Crisis in Malaysia: Causes, Response, and Results.” Islamic Economic Studies, vol.9 no.2. Jeddah, Saudi Arabia: Islamic Research and Training Institute.
Hasan, Zubair. 2003. “The 1997-1998 Financial Crisis in Malaysia: Causes, Response, and Results - A Rejoinder.” Islamic Economic Studies, vol.10 no.2. Jeddah, Saudi Arabia: Islamic Research and Training Institute.
Idris, Handi R. 2008. “OKI, IDB Bersikaplah!” Harian Republika3 November hal.7. Indonesia.
Izhar, Hylmun. 2008. “Keuangan Syariah dan Krisis Ekonomi.” Harian Republika 3 November hal.6. Indonesia.
Rusydiana, Aam S. dan Ascarya. 2008. “Determinan Inflasi Indonesia: Perbandingan Pendekatan Islam dan Konvensional.” Mimeo.
Sakti, Ali. 2007. Sistem Ekonomi Islam: Jawaban atas Kekacauan Ekonomi Modern. Paradigma & Aqsa Publishing, Jakarta, Indonesia.
Sanrego, Yulizar D. dan Nuruddin Mhd. Ali. 2008. “Krisis Global dan Babak Baru Ekonomi Islam.” Mimeo.
Shodiq, Muhammad. 2008. “Ekonomi Syariah, Solusi Krisis Keuangan Global.” Harian Republika 24 November hal.6. Indonesia
Siddiqi, Muhammad N. 2008. “Current Financial Crisis and Islamic Economics.” Mimeo.
Thomas, Abdulkader. 2008. “Lessons Not to Learn.” Islamic Finance Asia October/November Edition
Published
2010-04-16
How to Cite
Ascarya, A. (2010). LESSONS LEARNED FROM REPEATED FINANCIAL CRISES: AN ISLAMIC ECONOMIC PERSPECTIVE. Buletin Ekonomi Moneter Dan Perbankan, 12(1), 27-74. https://doi.org/10.21098/bemp.v12i1.466
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
