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Credit creation and control: an unresolved issue in Islamic banking

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  • Hasan, Zubair

Abstract

Abstract. This paper deals with a still unresolved issue - credit creation and control- in an interest free banking system. The available literature on the subject is scanty, controversial and inconclusive. The paper holds that credit creation per se is not un-Islamic; the essential point is how credit is generated and used. It argues that credit creation cannot be banished; it is an imperative for frictionless adjustment of money supply to unavoidable fluctuations in its demand in modern economies. It seeks to correct the misunderstanding in the literature that banks create credit ex nihilo.Demand for money apart, fiscal policies and foreign exchange transaction erode the credit controlling power of the central banks. The paper blames major difficulties including those of credit creation and control on the evolution of Islamic banking on the same pattern as its mainstream counterpart and suggests some structural modifications. Finally, it finds the conventional weapons of credit control inefficacious for use in an interest free banking system and suggests the inclusion of a ratio of cash to bank advances among them. The paper has some important technical and policy implications.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8130.

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Date of creation: 2008
Date of revision: 07 Apr 2008
Handle: RePEc:pra:mprapa:8130

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Keywords: Credit creation; demand for money; Base money; Credit control; Central bank;

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References

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  1. Wachtel, Paul, 2001. "Growth and Finance: What Do We Know and How Do We Know It?," International Finance, Wiley Blackwell, vol. 4(3), pages 335-62, Winter.
  2. Hasan, Zubair, 2005. "Islamic banking at the crossroads: theory versus practice," MPRA Paper 2821, University Library of Munich, Germany.
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Cited by:
  1. Hasan, Zubair, 2008. "Islamic finance education at graduate level: Current position and challenges," MPRA Paper 8712, University Library of Munich, Germany, revised 2008.
  2. Hasan, Zubair, 2011. "Money creation and control from Islamic perspective," MPRA Paper 39796, University Library of Munich, Germany, revised 21 Dec 2011.
  3. Mehri, Meryem & Jouaber, Kaouther, 2012. "A Theory of Profit Sharing Ratio under Adverse Selection: The Case of Islamic Venture Capital," Economics Papers from University Paris Dauphine 123456789/9551, Paris Dauphine University.
  4. Hasan, Zubair, 2008. "Islamic Banks: Profit sharing, equity, leverage lure and credit control," MPRA Paper 11737, University Library of Munich, Germany, revised Nov 2008.
  5. repec:pra:mprapa:39795 is not listed on IDEAS
  6. Ahmad M. Mashal, 2012. "Islamic Financial in the Global Financial System," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(1), pages 207-223, March.

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