slideshow

The Money Market in Islamic Finance

Posted on 18th July 2012 by Camille Paldi,

 

 Firenze

Thoughts from Iraj Toutounchian’s Islamic Money & Banking: Integrating Money in Capital Theory

“The money market, which plays such a major role in the capitalist system, is the result of speculation with money.  It is only logical, then, that the abolition of interest would lead to the total disappearance of this market.  Therefore, any changes in the level of investment in an Islamic economy should be directly attributed to the marginal efficiency of capital (or, equivalently, the rate of profit).

To summarize then:

Money has just two functions to perform: as a medium of exchange and a unit of account.  It can no longer be a store of value.

Money can be viewed as a public good.

Money is potential capital and as soon as it is legally combined with one factor of production its legal character changes to capital and hence is eligible for a reward in the form of profit, whose magnitude is neither fixed nor predetermined.

The volume of money is dependent upon the economic capacity of the economy.  Therefore, its supply can, in theory, increase indefinitely provided that the capacity allows.

Banks act as shareholders and are therefore not capable or allowed to create either money or credit.  They can only supply capital.  Hence, the conventional required reserve ratio is irrelevant and its rate can go down to zero.  Naturally, there would be no markets for money or loans in the system.  If these conclusions are correct, then what is the use of talking about the money market (as do Khan and Mirakhor 1987:177 and Khan 1985:12) or demand for money in an Islamic economy (see Chapra 1985: 209, for example?)  Therefore, the appropriate policy followed by banks can no longer be called ‘monetary’ policy, but rather ‘financial’ policy.

Based upon the assumption that all capital expenditures are financed through banks, the opportunity costs of capital is zero.

The ultimate result is that there can only be three markets in an Islamic system: labor, capital and commodity, in which their respective unit values are wage rate, profit rate, and price level.” (308-309)

“It has been made clear throughout this book that Western financial markets are essentially money markets built on speculation.  They produce instability via artificial risk and, by creating virtual, rather than real, wealth, distort the allocation of resources.  It is a zero-sum game that leads to an inequitable distribution of income and wealth and prevents the economy from moving towards equilibrium…

Past experience has shown that the constant manipulation of interest rates in the money market by the central banks of industrialized countries has both greatly damaged their credibility and produced uncertainty in the real sector.  As long as the central banks adhere to such damaging policies, the situation will only get worse.” (325) – Iraj Toutounchian


Posted on 18th July 2012 by Camille Paldi


Comment on this post







Twitter

    • 10th February @camille paldi
    • Disguising the Bible as the Qu'ran and then Reading it in Public ... https://t.co/eT0QDilSQM
    • 10th February @camille paldi
    • The Business Daily by FAAIF is out! https://t.co/H7O18TYUYU
    • 10th February @camille paldi
    • The Inter-faith Daily is out! https://t.co/Zq903PZpSS
    • 10th February @camille paldi
    • The Islamic Finance Daily is out! https://t.co/g32U2tFRpZ Stories via @sharingrisk @LankaBreaking @TimeQuran
    • 10th February @camille paldi
    • The Halal Daily is out! https://t.co/MtHHddtYfT Stories via @AdnanHalawi @HIDALGOFRANCIA @ZhaboomCanada
    • 10th February @camille paldi
    • Join Upcoming FAAIF Events! https://t.co/e2UIPYWKag
    • 9th February @camille paldi
    • Justice https://t.co/84voO7e7T7
    • 9th February @camille paldi
    • Register for Islamic Banking and Finance, Kanazawa, Japan! camille@faaif.com. https://t.co/pbbO0ybu2S
    • 9th February @camille paldi
    • https://t.co/tx87MYUrSu
    • 9th February @camille paldi
    • The Business Daily by FAAIF is out! https://t.co/Aqf79pboLn
    • 9th February @camille paldi
    • The Inter-faith Daily is out! https://t.co/gsz8jM6qpH Stories via @janak_pandit
    • 9th February @camille paldi
    • The Islamic Finance Daily is out! https://t.co/RovND48pqP Stories via @HalalOptions
    • 9th February @camille paldi
    • The Islamic Finance Daily is out! https://t.co/2DOcMUbjQH Stories via @TheodoreSanner @meglobaladvisor @07Masbro
    • 9th February @camille paldi
    • The Halal Daily is out! https://t.co/9HTUyaMp9b Stories via @andreisy @lc_halal @zrdzmrz
    • 8th February @camille paldi
    • "Book Review for Islamic Banking: Theory and Practice (2012) by *Dr. Muhammad Hanif" by @cpaldi on @LinkedIn https://t.co/l49FHyUGFb
    • 8th February @camille paldi
    • Register for Islamic Banking and Finance, Kanazawa, Japan! camille@faaif.com. https://t.co/xfBnOyX2me
    • 8th February @camille paldi
    • Register for Islamic Finance and Banking Tokyo, Japan! camille@faaif.com. https://t.co/61GiZ6DkV3
    • 8th February @camille paldi
    • Register for Islamic Finance and Banking, Seoul, Korea! https://t.co/jUAKrAcdyN
    • 8th February @camille paldi
    • The Business Daily by FAAIF is out! https://t.co/4eJgHJTfgl
    • 8th February @camille paldi
    • The Inter-faith Daily is out! https://t.co/gmVMWdwKo5 Stories via @jatuski @RodillaD

Articles

Islamic Finance, Opportunities, and Challenges

Islamic Finance, Opportunities, and Challenges

Islamic Finance – Opportunities and Challenges

By Mufti Ismail Ebrahim Desai

The Islamic Financial system has witnessed considerable developments in the past four decades and is now regarded as one of the fastest growing segment of the g...

Posted on 19th January 2016 by Mufti Ismail Ebrahim Desai

Book Review for Islamic Banking: Theory and Practice (2012) by *Dr. Muhammad Hanif

Book Review for Islamic Banking: Theory and Practice (2012) by *Dr. Muhammad Hanif

Book Review for Islamic Banking: Theory and Practice (2012) by *Dr. Muhammad Hanif

 

By: Camille Paldi

 

This textbook is a masterpiece on Islamic Banking combining financial th...

Posted on 21st December 2015 by Camille Paldi

Economic Efficiency of Islamic Financial Institutions Part II

Section 4         Alternative Policy Options and Steps

 4.1      Proper Risk Management: A Necessity Posted on 13th December 2015 by Muhammad Ayub and Camille Silla Paldi

Economic Efficiency of Islamic Financial Institutions Part I

Economic Efficiency of Islamic Financial Institutions Part I

Tense Dichotomy between Shari’ah Compliance and the

Economic Goals of Islamic Finance Institutions

Muhammad Ayub and Camille Silla Paldi

Video

Find all our videos here, and also a link to our YouTube video channel so you can view our 'video of the week'

Submit

We would like you to get involved with our site. So if you want to submit Articles, Videos, Events and Call for Papers, please click the button below:

Submit

Valid XHTML 1.1 |  Valid CSS |  Web Design in Durham and Newcastle |  Copyright © 2016

* Prices are converted at USD$0.2723 per AED 1