Financial crisis is defined as a situation when one or more than one institutions lose a huge or major part or their nominal values. Financial crisis can be further explained as the situation when the supply of money cannot compensate for the demand for money, which can also be explained where institutions quickly loses liquidity on its asset, caused by money that is withdrawn from the bank. Due to the growing economy all around the world, financial crisis has become a very common phenomenon across the globe especially in some specific sectors of the economy. Financial crisis can be further divided into varieties of crisis, and each of these crisis can be caused by different reasons, depending on the crisis. However, financial crisis is …show more content…
One of the most common examples of financial crisis is banking crisis. Banking crisis is defined as the situation when the bank is facing bankrupt due to the insufficient of cash flow. Banks usually gain their profit by providing deposit accounts to users, and uses those deposits to provide loans that are paid in a long period of time and gain profit through interest. Try to imagine that if all of the depositors wishes to withdraw their money at the same time, the bank will not be able to return all of the money because part of the money has been used to give out loans or investments. This situation is known as a bank run. Banks facing this kind of situation will lose their liquidity and causing customers to lose their deposit savings (Kose & Claessens, 2013). Therefore, banks are always cautious and will try to avoid this kind of situation from happening. Thus, banks may be unwilling to give out loans or provide credit to users because the bank is afraid that they might be incapable of lending out those cash. But on the other hand, this will cause another situation which is also known as credit crunch and it might also accelerates a financial crisis. Therefore, very bank has a set of measures that strikes a balance on how much they loan that they could provide to their customers and to prevent themselves from these two potential financial crises. (I don't know whether this paragraph is necessary , cut …show more content…
According to Abdulkareem Abu al Nasr, The CEO of NCB, or Al-Ali Bank, global financial crisis happens because of " excessive use of structured debt and securities which drove unsustainable levels of financial leverage'' (Could Islamic Banks Help, 2012). On the other hand, Islamic banks that prohibits riba prevents this kind of situation from happening. Islamic banks focused their activities mainly on domestic markets, where most of the activities involved tangible objects instead of debt based financing. That way, Islamic banks would not be seriously affected even when financial crises hits the economy. Conventional banks gain their profit mainly from giving out loans to borrowers and receive interest in the process by using money deposited by customers. This causes conventional banks to be exposed to banking crisis where the bank is incapable of returning the money to depositors due to the moneys given out for loans or investment purposes. Therefore, it can be conclude that the nature of Islamic law, Shariah has a major contribution to the stability of Islamic banks around the world during financial
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
The credit crisis is referred to as economic downturn by credit squeeze, provision of doubtful debt and bankruptcies among others. (IMF, 1998) Credit crisis is known as a credit crunch, it is an extension of recession. According to the Ocaya (2012), Credit crisis is a sudden shortage of loan and tightened the requirement of economy and society needs of getting loan from financial institutions. In such situation, lender started keeps the cash and stop lending money because they are worry about a large of debtor bankrupt and mortgage defaults. Lender had adjusted the interest rate of borrowing to unaffordable rate. Credit crisis decrease the total demand and fall in supply, therefore, it constrains the growth of the economy. The credit crisis is begun in the early 2006 when several events relating the financial system went wrong in the United States of America. The factors leads to credit crises are complex with varying weight.
To explain the crash of the stock market greatly reduced “American aggregate demand substantially. Consumer purchases of durable goods and business investment fell sharply after the crash” (Romer). The financial crisis made consumers and firms to stop spending money and start saving their money. Another aspect of the Great Depression was the banking crisis. The banking crisis began due to the financial crisis and that made consumer lose confidence in their banks and demand that their bank give them their money back. Banks, “which typically hold only a fraction of deposits as cash reserves, must liquidate loans in order to raise the required cash. This process of hasty liquidation can cause even a previously solvent bank to fail” (Romer). The loss of confidence in the solvency bank cause people to starting saving the money at home and that in return causes many banks to close and at this time the Great Depression was at full
A panic occurs when a large number of people frantically tries to exit the market, causing severe stock market crashes and widespread bankruptcies. Generally, panics are preceded by the bursting of bubbles in areas of speculative activities, which causes speculators to default on their loans. The failure of speculators may not cause significant damage to the economy alone, but such failures may cause depositors to panic, irrationally fearing that they too would lose their investments and withdrawing from the market – hence the name “panic”. The withdrawal of funds would then cause significant liquidity problems for banks and other financial institutions, which
The financial crisis occurred in 2008, where the world economy experienced the most dangerous crisis ever since the Great Depression of the 1930s. It started in 2007 when the home prices in the U.S. Dropped significantly, spreading very quickly, initially to the financial sector of the U.S. and subsequently to the financial markets in other countries.
The debt crisis was know as financial crisis and defined as a point of a country's foreign debt accumulation exceed it's earning power and the country has no ability to repay the debt.
The financial crisis of 2008 and 2009 is considered by others as the worst financial crisis since the Great depression of 1930. However there were other financial crisis which had happened after the Great depression which were equally disastrous. The one that comes in mind was the financial crisis of the 1980s and early 1990s. It is always overlook by others because of the 2008 credit crunch which happens to be the recent one. It became known as Savings and Loans crisis which basically let to substantial public-funded rescue of an industry that had crumpled and on it knees begging for help. The Savings and Loans crisis is smaller in nature compare to the banking crisis of 1920s and the 1930s. This crisis forced the state and federal regulatory and deposit banking insurance systems to their brim and finally leading to extensive changes to the regulatory environment. It was the bankruptcy of 1,043 savings and loan associations among the 3,234 savings and loan associations in the USA from 1986 to 1995.
Islamic finance is a term that reflects financial business that is not contradictory to the principles of Sharia. Conventional finance, particularly conventional banking business, relies on taking deposits from, and providing loans to, the public. Therefore, the banker‑customer relationship is always a debtor‑creditor relationship. A key aspect of conventional banking is the giving or receiving of interest, which is specifically prohibited by Sharia. For example a conventional bank’s fixed deposit product
Velde,D.K (2008). The global financial crisis and developing countries. Available at: http://www.odi.org.uk/resources/download/2462.pdf (Accessed: 5th August 2010).
As the world has recently passed through the global financial crisis that begun in 2008 in the USA with the banks’ collapsing, analysts are giving different opinions and making new economic hypothesizes about the origin of, as well as the process of different countries escaped from the crisis. Among all these new “theories”, the case of Islamic banks is interesting in terms of its nature and consequences. In my essay, I will try to highlight the basic principles of the Islamic finance, the reasons of the restriction of interest, the most important tools used by Islamic banks in economic activities and brief explanation of them, and finally my view point of the probable future improvement of the Islamic financial system.
Financial crises have influenced the os of financial markets in past. The most important the Great Depression in 1929-30, the 1970s inflation failures and the banking difficulties in the 1990s led to problems in the financial markets causing serious disturbance. The recent financial crisis which became known in 2007, though the roots were implanted much earlier, has been the worst situation financial markets have ever faced.
...ng safety to risk weary investors and liquidity to borrowers. The dramatic effects of weak banking systems can be seen in both developed and developing economies and the repercussions these have had on financial markets everywhere. Each occasion is a reminder of the need for strongly capitalized financial institutions.
Warwick J. McKibbin, and Andrew Stoeckel. “The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file.
Global debt crisis is essentially widespread globally. There are different issues that can cause debt crises. Currently, different countries around the world are facing debt crises, and definitely that is because of an error in the banking system. We’ll see below what are the main causes briefly and what are really the objectives that lead to a collapse in the banking system or so financial crisis.
There are 3 differents kind of crisis : Strategy crises , Success crises , crises of liquidity