The authors note that the instability leading to crisis is assumed away by the models which assume inherent stability. Economists are confined to models of stable states that are perturbed by limited external shocks. Economists failed to incorporate the intrinsic recurrent boom-and-bust dynamics characteristic of a complex economic system. Consequently, ‘systemic crisis’ is treated as an ‘otherworldly event’ absent from theoretical frameworks.
Islamic digital currencies must refrain from a number of actions deemed prohibited by Islamic law, in contrast to traditional cryptocurrencies like Bitcoin. They cannot entail interest-based transactions (Riba), undue speculation or uncertainty (gharar), or gambling (maysir). Their frequent backing by physical assets, such as gold, gives them inherent stability and lessens the speculative bubbles that are typical of traditional cryptocurrencies, which is what makes them so intriguing.
Using a contract-theoretic model, Khan compares two financial arrangements: the Fixed Return Scheme (FRS), which mirrors conventional debt, and the Variable Return Scheme (VRS), which represents profit-and-loss sharing (PLS) contracts such as Mudarabah or Musharakah. His analysis assumes a single lender allocating a fixed pool of funds across many independent projects, with symmetric information and costless observability.
Financial crises are often linked to unsustainable booms in financial and business cycles. Research shows that credit and house price cycles are closely tied to output cycles. From an Islamic perspective, synchronizing financial and business cycles can promote stability. A Shari’ah-compliant system without interest rates can align the financial cycle with the real economy, bolstering stability.
There are various risks faced by Islamic banks in liquidity management due to the i) absence of an Islamic inter-bank market, ii) lack of Shari’ah compliant alternatives for liquidity management, both at the inter-bank and central bank level, iii) absence of liquid Islamic Sukuk both in short and long term maturities and iv) absence of Islamic discount window at the central bank level for Islamic financial institutions.
Islamic Economics Project 