Islamic finance and financial stability: A review of the literature

This paper provides a critical review of the islamic economics (ie) and finance (if) literature that has examined the stability of the islamic financial system (ifs) and its institutions vis-à-vis the conventional interest-based system. the paper analyzes forty studies over the last thirty-year period (1983-2013). two sub-periods: pre-and post- subprime financial crisis are compared. the pre-crisis period focuses on theoretical investigations while the post-crisis focuses on empirical research. the results show that the crisis seems to have triggered more attention to the stability of ifs. seventy-five percent of the reviewed literature relates to the post-crisis era. about five studies are produced per year during 2008-2013 in contrast to less than one per year in the previous era. the results show that there is a significant divergence between the theory and practice of if. theoretical studies claim the 'superiority' of ifs based on pure 'equity' and participatory modes of financing while empirical studies are not yet conclusive.