Such engagement also facilitates cooperation and collaboration in achieving our shared interest of preserving global financial stability. The combination of indiscriminate lending, excessive risk-taking and overzealous financial innovation were at the root of the current financial crisis. The financial turmoil that first originated in the mortgage market in a number of the advanced economies triggered a broad-based meltdown and subsequent breakdown in the functioning of the financial markets. Despite these developments, the Islamic financial industry has been able to weather this first wave of the global financial crisis, demonstrating its robustness as a stable form of financial intermediation. The resilience of the Islamic financial institutions during this crisis epitomises the intrinsic strengths embedded in Islamic finance that are underpinned by forces of the Shariah principles. This arises from two essential requirements of Islamic finance – firstly, that the financial transaction must be accompanied by an underlying productive economic activity that will generate legitimate income and wealth, thereby establishing a close link between the financial transactions and productive flows. Thus, in the Islamic finance business model, financing or equity participation can only be extended to activities in the real sector that have economic values. Hence, Islamic financial assets are expected to grow in tandem with the growth of underlying economic activities. Secondly, that it is based on profit sharing in which there is a mutual risk sharing. Islamic finance, therefore, impels the Islamic financial institutions to undertake the appropriate due diligence on the viability of business proposals and by enforcing the requirement for transparency and disclosure.
Initially, about three-quarters of the GDP’s increase came from manufacturing, which represents only about 20 per cent of Sweden’s economy. This meant that bottlenecks occurred fairly quickly, accompanied by various types of inflationary impulses. Our relatively small industrial sector cannot be expected to sustain a growth rate that is higher than the total economy achieved in the 1970s and 1980s. The problem with the dual economy -- a flourishing export-related industrial sector and a rather weak recovery in sectors with a more domestic orientation -- stemmed in part from low confidence in economic policy’s determination and ability to keep inflation low in the longer run. This in turn was a consequence of Sweden’s poor record in this respect, coupled with serious problems with government finances. Long bond rates fluctuated widely and in 1994 and 1995 they actually climbed to the levels of the years of high inflation. The exchange rate continued along its depreciating path from the 1970s and 1980s. For the Riksbank, the lack of confidence in the direction of economic policy left little room for manoeuvre. Although the instrumental rate was lowered during the spring of 1994, virtually all the market rates and particularly those for longer maturities rose. Sweden was approaching a point where economic policy had to demonstrate that the focus on stability was a firm commitment. The monetary tightening and, perhaps to an even greater extent, the fiscal consolidation gradually generated increased confidence in Sweden’s readiness and ability to achieve low long-term inflation.