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Credit Cycles in the Market of Islamic Finance: Theory and Experimental Evidence

Author: Dmitry V. Burakov

Abstract:

The article discusses specifics of credit cycles in Islamic model of finance. The paper holds a microeconomic analysis of multiple equilibria’s dynamics in the market of Islamic finance. As a result of a constructed model of multiple equilibria, the author assumes that, firstly, Islamic model unlike traditional model of banking features lower risk accumulation due to the unwillingness of counterparties to take risks, and, secondly, relatively less appetite for risk should have an impact on the amplitude of the credit cycle. The results of the experimental research confirm our assumption about lower-level exposure of Islamic model of finance to excessive risks-taking.

Keywords: credit risk; credit cycle; Islamic finance; credit management.