WHY DO PEOPLE SEE A FINANCIAL SYSTEM AS A WHOLE VERY IMPORTANT?

Dian Masyita
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Dian Masyita: University of Padjadjaran

Journal of Islamic Monetary Economics and Finance, 2015, vol. 1, issue 1, 79-106

Abstract: The action of one person will affect the others and then the action of one country will affect other countries. Financial crisis is like a contagious disease, which spreads everywhere. The failure in capturing systemic risk is the interconnected market events (’network externalities’) can produce self-reinforcing cycles then create the harmful situation. What happened in the banking regulation particularly Basel II? In reality, Basel II did not work completely in 2008. Since the implementation of risk management based on Basel II has been a prerequisite for a bank, it is supposed to make a positive impact. Misplaced reliance on mathematical model and statistics in managing risk could one of the problems in the decision making process. Using system thinking, system dynamics paradigm and theory of feedback system, this paper tries to see the risk management from different perspective and to enrich the understanding of how financial systems work: what drives them and causes the behavior. Many lessons can be learnt from this financial contagion since Islamic banking and finance system has inevitably been a part of the international financial systems.

Keywords: Financial Crisis; Interconnected Events; System Thinking; System Dynamics; Islamic Banking and Finance (search for similar items in EconPapers)
JEL-codes: D10 D80 E50 E60 G20 G32 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:idn:jimfjn:v:1:y:2015:i:1d:p:79-106

DOI: 10.21098/jimf.v1i1.484

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