To read the full version of this content please select one of the options below:

Schumpeter’s creative destruction and the credit crunch of 2007–2008: an Islamic banking perspective

Simon D. Norton (Cardiff Business School, Cardiff University, UK)
Vahid Molla Imeny (Ferdowsi University of Mashhad, Mashhad, Iran)

Qualitative Research in Financial Markets

ISSN: 1755-4179

Article publication date: 19 March 2021

Issue publication date: 7 June 2021

164

Abstract

Purpose

This paper aims to compare products traded in secular and Islamic banking environments prior to the credit crunch of 2007–2008; to locate the comparison in a Schumpeterian model of creative destruction of dynamic innovation in the capital markets; and to evaluate the implications for diversity of investor product choice.

Design/methodology/approach

Financial products are critiqued using qualitative criteria, including underestimation of risk implicit in mortgage-backed securities and securitisation, excessive speculative activity in credit default swaps and the magnification of leverage and volatility. Comparable Islamic products are considered for the extent to which they facilitate the same precursors of market crises.

Findings

Innovation in secular financial markets has traditionally led to asset bubbles, underestimation of risks and market exuberance. Islamic banking constrains creativity by prohibiting risk transference and disconnection of financing activity from social context and economic purpose. As such, the latter reduces Schumpeterian creative destruction but at the cost of reduced investor choice and market liquidity. Restriction of the reallocation of risk between those who do not wish to hold it and those who do dampens innovation but would have prevented the trading of products which contributed to the credit crunch.

Originality/value

The constraining effect of Islamic banking upon creativity and innovation is considered alongside its capacity to reduce market volatility, speculation and systemic instability. Schumpeterian theory deepens the analysis in terms of the drivers of innovation and market collapse.

Keywords

Citation

Norton, S.D. and Molla Imeny, V. (2021), "Schumpeter’s creative destruction and the credit crunch of 2007–2008: an Islamic banking perspective", Qualitative Research in Financial Markets, Vol. 13 No. 2, pp. 199-214. https://doi.org/10.1108/QRFM-07-2020-0126

Publisher

:

Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

Related articles