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Preventing Residential Mortgage Crises: An Islamic Finance Perspective

The 2008 Financial Crisis has compelled the international financial industry, politicians and homeowners to search their souls for the root causes of the problem. Many point to insufficient regulatory supervision, others to a culture addicted to credit and sheer greed. While these issues certainly exist, we believe that the residential mortgage and capital markets harbor structural attributes that are fraught with uncertainty and create opportunities for unjust enrichment and exploitation. These malaises, among others can be prevented by applying some core principles from Islamic Finance, a system predicated on transparency and justice, and which seeks to benefit society as well as entrepreneurs. In this paper, we employ Islamic Finance principles to analyze the current predicament and to make recommendations that can prevent similar crises from recurring in the future.