Islamic principles could have prevented financial crises

In times of financial upheaval, investors seek not just stability – but systems that resist collapse from the inside out, HSBC India Manager Moeennawaj Pirjade shared with IFN Investor.

Touching on three major fiscal turmoil scenarios in recent years, Moeennawaj said all these situations were exacerbated by elements that are prohibited – or deeply discouraged – in Islamic finance, which insists on values-first architecture designed to prevent systemic harm.

Drawing on his experience in fraud risk management, he said the 2008 global financial crisis was triggered by toxic mortgage-backed securities and speculative leveraging – where the collapse stemmed from interest-based debt cycles, lack of transparency and moral hazards involving fraud.

To overcome deficiencies in subprime mortgage lending, excessive leverage and opaque derivatives, Moeennawaj recommended the implementation of Murabahah and Ijarah sale-based contracts.

“These require backing of real assets and transparency, avoiding synthetic conventional instruments like the collateralized debt obligation. As an alternative to mortgage-backed securities, Sukuk issued would be tied to tangible assets, reducing contagion risk.”

The 2023 Silicon Valley Bank collapse was triggered by asset-liability mismatch and panic withdrawals. This could have been prevented by using Mudarabah and Musharakah facilities – where profit-sharing models align investor and entrepreneur incentives, discouraging short-term speculation.

An added option would be to conduct liquidity management via commodity Murabahah using principles that offer Shariah compliant liquidity tools without interest-bearing instruments.

Looking at the 2021 Evergrande crisis of an overleveraged China property developer with opaque debt structures, Moeennawaj noted that Islamic contracts would have enforced asset-based discipline and prevented excessive borrowing.

“Ideally, they should have been using the Istisna and Ijarah Muntahia Bittamleek structured financing for construction and leasing, with clear asset ownership and risk-sharing.”

Moeennawaj explained that Islamic finance principles build systemic resilience due to key safeguards that include:

• Prohibition of Riba: Removes compounding debt risk, avoids exploitative lending;
• Asset-backed transactions: Promotes real economic activity through instruments like Sukuk;
• Risk-sharing: Ensures ethical alignment between investor and entrepreneur; and
• Avoidance of Gharar: Encourages transparency, discourages gambling-like behavior.

Practical Islamic products for crisis recovery