The Role of Money in Financial Instability and Possibilities of Reformation within an Islamic Financial System دور النقود في زعزعة الاستقرار المالي وإمكانية الإصلاح في إطار نظام تمويل إسلامي

Money supply is considered a major factor in tampering with financial and economic stability. The international experience of liberal monetary systems has shown that the increase in money supply through credit creation plays the most serious role in disrupting financial and economic stability. That was particularly true in the most disruptive crises of 1929 and 2008. The article discusses the extent to which this phenomenon is related to the behavior and policies of conventional financial institutions, whose lending activities is geared to trade in money and debts, for sake of maximizing their earnings. Islam's view of money is different. Money is a means and not an end. The society needs money to produce and exchange goods and services and to meet the financial obligations that are associated with such operations. While prohibition of usury (interest) is absolutely recognized in Islamic research, the permissibility of creating or generating bank money within an Islamic framework is still debated. What is the reality of money that is created by banks? Is it really Shari’ah incompliant? Or does it violate Sharia because its generation is thought to be inseparable from the interest system? And assuming that credit creation would be associated only with profit/loss sharing, would its expansion be also inflationary? Response to these questions, and others, requires discussing and analyzing the effects of credit generation firstly; under ideal conditions which assume an authentic and integrated Islamic banking system that is regulated by Islamic monetary policies, and secondly; under practical conditions of dualistic banking system and Islamic banks are subject to secular central banking policies. Under these different conditions, the research aims at revealing possibilities of removing or minimizing the destabilizing role of money and credit creation when an Islamic financial system is fully or partially applied in practice.