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

Salman Syed AliDLC Lecture

23 November 2010

Money and Banking in Islam

Two Parts of the Presentation:MoneyBanking

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.

IssuesOutside MoneyInside MoneyCredit Creation vs Investment CreationThe 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.

GoldGold SilverSilver WheatWheat BarleyBarley DatesDates SaltSalt

GoldGold

SilverSilver

WheatWheat

BarleyBarley

DatesDates

SaltSalt Source for this slide: Sami Al-Suwailem’s presentation on riba

The Principle of SimilaritySimilarity negates gain from tradeVariety allows mutual benefitDiversity is essential for prosperityStronger similarity imposes stronger

restrictions of exchangeRiba: imbalanced exchange of similars

At least two monies needed in Islamic economy.

Role of Bank in Islamic FinanceBanks 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

Issues in Model-1Liquidity ManagementMarket RiskInsolvency RiskWithdrawal Risk

Stability

Three Models of Islamic Banking

Issues in Model-2Liquidity ManagementMarket RiskInsolvency RiskWithdrawal Risk

Stability

•Commodity Murabaha as liquidity management device•Treasury instrument

Three Models of Islamic Banking

Issues in Model-3Liquidity ManagementMarket RiskInsolvency RiskWithdrawal Risk

Stability

Commodity Murabaha as:• SOURCE OF FUND• instrument for maturity transformation

Use of Commodity Murabaha as Source of Funds