Economy Downturn, Islamic Banking and the Indirect Consequences of the Global Financial Crisis

This paper theoretically reviews at different micro-levels some properties of Islamic banking that might have been negatively affected by economic downturn, namely, at the sector, operations and contract level. The discussion of the Selected Literature argues that while Islamic banking might have remained in a relatively better position compared to the conventional banking during the early phases of the crisis, they were less likely to continue outperforming their counterparts in conventional banking during the sequent economy downturn. This is largely due to their nature of evolving, scale-disadvantage, complex instruments and lax risk-mitigation tools available to them. That is, Islamic banks are exposed to a higher degree of risk, as well as many different and unique types of risk and possess few risk-mitigation tools, which could lead them to be relatively more vulnerable to financial shocks.