1. Sami Al-Suwailem IRTI, IDB Thul Qeida 1429 – November 2008 Root Causes of the Financial Crisis

2. The Global Financial Crisis Worst in 100 years Capital Markets lost $20+ trillions this year Financial institutions lost $2.8 trillions Main St. just starting to feel the pain

3. Root Cause Excessive leverage Mountains of debt and financial commitments Inherent tendency towards excessive debt

4. Debt wealth Inverted Pyramid

5. Unsustainable System Debt accumulates faster than wealth Debt burden becomes unbearable Minor shocks make the system crash Crashes needed to “clean up” the system Financial fragility Then debts start accumulate again faster than wealth Recurrent crashes Very costly system

6. Sources of Danger Riba Gharar

7. Figures Debt is growing at an average growth annual rate: 35%, for GDP 20%, M2 17% Debt-GDP ratio grew from 1.2 to 2.2 Debt-M2 ratio grew from 2.2 to 4.2 Unsustainable system

8. Gharar Zero-sum games that create no wealth How it can destroy wealth? Side bets magnify losses Derivatives: $600+ trillions Credit default swaps: $55 trillions How CDS contributed to the crisis

9. Conclusion Roots of evil: riba & maysir Both allow mountains of commitments and debt to accumulate beyond existing wealth Unsustainable system Islamic economics build a stable system with bounded cycles

10. Debt in the US

11. Riba Separates debt creation from wealth creation Debt grows faster than wealth Debt services become unbearable Pressure on wealth base accumulates Crash is needed to restore balance