REVISITING ANALYSIS OF THE ROOT CAUSES ON FINANCIAL CRISIS IN ISLAMIC PERSPECTIVE

Mega T.R. Luik () and Ahlis Fatoni ()
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Mega T.R. Luik: Master student in Economics, Kulliyah of Economics and Management Sciences, International Islamic University Malaysia
Ahlis Fatoni: Ph.D candidate in Islamic Banking and Finance, International Islamic University Malaysia

Journal of Islamic Monetary Economics and Finance, 2018, vol. 4, issue 1, 39-60

Abstract: Steady financial system stability is important in economy. The financial crisis showed a constantly recurring problem that has not been resolved completely. Macro prudential policy, which became the term savior after the subprime mortgage crisis was essentially a temporary not eliminate the root causes of the problems of the financial crisis. This study attempts to revise the root causes of the financial crisis in the perspective of Islam by using three approaches namely Vector Error Correction Model (VECM), Error Correction Model (ECM), and Distributed-Lag Autoregressive (ARDL). The result of this study that the consistence of ribâ (interest rate) variable as the main factor of crisis; ribâ increases the inflation and decreases the growth. The IRF (impulse response function) result and FEVD (forecast error varian decomposition) show 21.87% interest rate (INT) increases the inflation and decreases the growth by 9.5%. Meanwhile, profit-loss sharing (PLS) variable contributes to decreases the inflation by 0.02% and increases the growth by 0.61%. Reciprocally, with ECM approach, interest rate (INT) has positive effect to inflation and negative effect to growth (financial crisis) vice versa PLS significantly has negative effect to inflation and positive effect to growth, whereas ARDL approach shows that PLS increases the growth at long and short run but also increases the inflation at long run. Another conventional variable consistently contributes to financial crisis according to all approaches; volatile food (VFP) and administered price (ADM).

Keywords: Financial Crisis; Inflation; Growth; Ribâ; Profit-loss sharing (search for similar items in EconPapers)
JEL-codes: E44 E51 G01 G21 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:idn:jimfjn:v:4:y:2018:i:1c:p:39-60

DOI: 10.21098/jimf.v4i1.745

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