Salman Syed Ali DLC Lecture 23 November 2010 Money and Banking in Islam

Two Parts of the Presentation: Money Banking

Discussion of money in fiqh (riba, gharar, forward contracts, foreign exchange transactions, and debt transactions) Inference on money from hadith on riba al-fadal Economists’ explanation of money (related literature)

Source for this graph : Taken from the Clarendon Lecture “Evil is the Root of all Money” by Kiyotaki, Nobuhiro and John Moore (2001)

Source: Taken from the Clarendon Lecture “Evil is the Root of all Money” by Kiyotaki, Nobuhiro and John Moore (2001)

Graph based on the Clarendon Lecture “Evil is the Root of all Money” by Kiyotaki, Nobuhiro and John Moore (2001)

Source: Taken from the Clarendon Lecture “Evil is the Root of all Money” by Kiyotaki, Nobuhiro and John Moore (2001). My arguments added.

Source: Taken from the Clarendon Lecture “Evil is the Root of all Money” by Kiyotaki, Nobuhiro and John Moore (2001). My arguments added.

Issues Outside Money Inside Money Credit Creation vs Investment Creation The multiplier process is the result of the behavioral and institutional factors including the fractional reserve banking system but not of interest alone. Interest accelerates the multiplier affect to run away faster than real economic growth.

GoldSilverWheatBarleyDatesSalt Gold      Silver      Wheat      Barley      Dates      Salt      Source for this slide: Sami Al-Suwailem’s presentation on riba

The Principle of Similarity Similarity negates gain from trade Variety allows mutual benefit Diversity is essential for prosperity Stronger similarity imposes stronger restrictions of exchange Riba: imbalanced exchange of similars

At least two monies needed in Islamic economy.

Role of Bank in Islamic Finance Banks in Islamic finance exist not just to make IOUs tradable (i.e., not simply to create inside money), however they do create it to the extent they hold demand deposits. But they exist to provide specialization and diversification services in investments to their depositors and financing to their clients (entrepreneurs).

Three Models of Islamic Banking Mudharaba - Bank - Mudahraba

Issues in Model-1 Liquidity Management Market Risk Insolvency Risk Withdrawal Risk Stability

Three Models of Islamic Banking Mudharaba - Bank - Mudahraba Mudharaba - Bank - Murabaha

Issues in Model-2 Liquidity Management Market Risk Insolvency Risk Withdrawal Risk Stability Commodity Murabaha as liquidity management device Treasury instrument

Three Models of Islamic Banking Mudharaba - Bank - Mudahraba Mudharaba - Bank - Murabaha Murabaha - Bank - Murabaha

Issues in Model-3 Liquidity Management Market Risk Insolvency Risk Withdrawal Risk Stability Commodity Murabaha as: SOURCE OF FUND instrument for maturity transformation

Use of Commodity Murabaha as Source of Funds