Impact of Global Financial Crises on Global Financial Stability and Need for an Alternative Financial System*

Th e main objective of this paper is to highlight the importance of the fi nancial stability of the global fi nancial system particularly aft er the recent global fi nancial crisis of 200809. Th e major causes of diff erent fi nancial crises possess the same pattern of greed among investors, ineffi ciency of government regulators, central banks and other stakeholders. Th ey have miserably failed to fi x the structural problems such as control of excessive debt lending, enforcement of eff ective regulations, prohibition of speculative business activities and unethical business practices in the global fi nancial system. Islamic fi nancial system, whose size of global assets crossed the mark of US$ 2.1 trillion by the end of 2015, which is relatively very small as compared to the conventional fi nancial system, is rapidly growing as an alternative system. It prohibits unethical economic activities such as speculative derivative trading, uncontrolled excessive debt lending and promotes an interest-free fi nancial system based on profi t, loss and risk sharing principles. Th is paper concludes that global fi nancial stability could only be achieved if proper corrective actions were taken. It also shows that the Islamic fi nancial system was less aff ected by the recent global fi nancial crisis compared to the conventional fi nancial system because it imposes strict rules and prohibits investments in toxic assets.