Question

1. Define factors that contribute to financial crisis?

2. What are the prohibitions in Islamic finance instruments and transactions?

Answer 1

As per policy, only one question is allowed to answer, so answering 1 :

1. There exists several negative factors in an economy that can lead to an economic crisis. The starting of crises will depend on the strength of the nation. If the economy is strong enough to avail any kind of financial shortage, then the financial crises can't come to it. Some of the factors which could lead to financial crises in a nation are :

a) Nation's Stock Market/Credit Market problems: When the stock market crashes and it results in a significant losses for individuals and businesses which are holding various equity investments. It lead to heavy losses in the financial market which lead to crisis.

b) Inter country currency fluctuations problem : When the currency of a nation get affected with the rampant inflation which lead to hyper-inflation, which causes the currency to loss its value and made the individuals to purchase any thing. No currency is working in the economy, leads to financial crisis.

c) Hyper - credit Contraction in nation : When the credit got contracted in an economic and lead to difficult for the individual / businesses to repay and results in heavy losses and loss of money and creditability. Such situation goes out of the hands of central bank of the nation and a financial crisis rises in the nation.

d) Lack of governance : When the governance of the nation has no control on the activities of the nation. It spends more than the receipts, so a huge deficits keeps on building. The deficit building leads the trade deficit and credit indebtedness of the nation rises. The situation leads to financial crisis.

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