Residentential Mortgage Crisis

Draft- Confidential

Khan, Iliasu, Chowdhry 1

Preventing Residential Mortgage Crises: An Islamic Finance Perspective By Waleed Khan a , Dr. Fatimah B. M. Iliasu b & Sajjad Chowdhry c Abstract The 2008 Financial Crisis has compelled the international financial industry, politicians and homeowners to search their souls for the root causes of the problem. Many point to insufficient regulatory supervision, others to a culture addicted to credit and sheer greed. While these issues certainly exist, we believe that the residential mortgage and capital markets harbor structural attributes that are fraught with uncertainty and create opportunities for unjust enrichment and exploitation. These malaises, among others can be prevented by applying some core principles from Islamic Finance, a system predicated on transparency and justice, and which seeks to benefit society as well as entrepreneurs. In this paper, we employ Islamic Finance principles to analyze the current predicament and to make recommendations that can prevent similar crises from recurring in the future. Introduction The current credit crisis has hemorrhaged hundreds of billions in losses worldwide, leaving in its path ruins ranging from venerable banks to individual homeowners. Despite the efforts of government to limit the fallout, limited liquidity, eroding homeowner equity, mounting loan defaults and inflationary pressures have hampered the U.S. economy, which is languishing now in a deep recession. Efforts underway to create stability have been short-term and mostly address the symptoms; however, the root causes persist and must be targeted to prevent another crisis. Even with the passing of the

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[e-mail] [e-mail] c [e-mail] b [e-mail]
Electronic copy available at: http://ssrn.com/abstract=1481984

7/9/2009

Draft- Confidential

Khan, Iliasu, Chowdhry 2

“Wall Street Bailout” package uncertainty in the credit market looms and no clear end