Global Financial Crisis and the Link Between the Monetary and Real Sector : Moving Beyond the Asset-Backed Islamic Finance

A major factor behind this crisis is financialization of the system, with a growing disconnect between the monetary and the real sector. Some proponents of the Islamic finance claim such financial crisis would have been avoided, if asset-backed Islamic finance were adopted. However, while Islamic finance in form and legality is asset-backed at the micro-juristic level, it is still largely delinked from real sector at the macro level. This paper articulates the need for Islamic finance to be better embedded in the reality of the real sector and be more effective to achieve the broader economic goals that it proclaims to pursue