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Credit Default Sharing Instead of Credit Default Swaps: Toward a More Sustainable Financial System

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  • Nader Naifar

Abstract

The central cause of all recent financial crises (including the Asian financial crisis, the European debt crisis, and the subprime mortgage crisis) was the debt crisis. The primary objective of this study is to examine the principles of risk-sharing promoted by Islamic finance as a possible reform of or complement to the current financial system. The secondary objective of this paper is to explain how and why the famous credit default swaps (CDSs) markets expanded and why they contributed to the recent financial crisis. In addition, I propose a new financial instrument to hedge default risk (credit default sharing) based on the principles of risk-sharing and Islamic insurance, takaful (sharing responsibility and mutual cooperation), as a substitute for CDSs. I explain that credit default sharing can reduce counterparty risk, improve banks' monitoring incentives, reduce systemic risk and contagion in financial systems, and eliminate "empty creditors."

Suggested Citation

  • Nader Naifar, 2014. "Credit Default Sharing Instead of Credit Default Swaps: Toward a More Sustainable Financial System," Journal of Economic Issues, Taylor & Francis Journals, vol. 48(1), pages 1-18.
    • Handle: RePEc:mes:jeciss:v:48:y:2014:i:1:p:1-18
    DOI: 10.2753/JEI0021-3624480101
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    Cited by:

    1. Naifar, Nader, 2016. "Do global risk factors and macroeconomic conditions affect global Islamic index dynamics? A quantile regression approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 29-39.
    2. Khan, Ashraf & Hassan, M. Kabir & Paltrinieri, Andrea & Dreassi, Alberto & Bahoo, Salman, 2020. "A bibliometric review of takaful literature," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 389-405.
    3. Naifar, Nader & Hammoudeh, Shawkat & Al dohaiman, Mohamed S., 2016. "Dependence structure between sukuk (Islamic bonds) and stock market conditions: An empirical analysis with Archimedean copulas," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 148-165.
    4. Mudiangombe, Benjamin & Muteba Mwamba, John Weirstrass, 2019. "Dependence Structure of Insurance Credit Default Swaps," MPRA Paper 97335, University Library of Munich, Germany.

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