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Credit creation and control: an unresolved issue in Islamic banking

Author

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  • Zubair Hasan

Abstract

Purpose - To reopen for discussion the issue of credit creation and control in the area of Islamic banking. Design/methodology/approach - In view of a rapid expansion of Islamic banking in recent decades, the answer to questions whether Islamic banks can create credit like mainstream banks and, if yes, what methods central banks could use to control it in their case is of paramount importance. An overview of the literature on the subject is provided and credit creation process is explained as background material for the discussion. Findings - The literature on the subject is scanty, controversial and inconclusive. One reason seems to be the mismatch between structural design of Islamic banks and the objectives they are supposed to meet. It is concluded that Islamic banks can create credit in the usual manner but central banks will have to design new tools for credit control applicable to Islamic banks. Research limitations/implications - It is not a rigorous analytical exercise as the main purpose of the paper is to reopen an important issue for discussion. It is an opinioned work and presents rather tentative answers to the questions raised. Practical implications - The findings of the paper may have serious implications for the current structure of Islamic banks and the legal framework for regulating their credit creation activities. Originality/value - The paper draws attention to a rather neglected issue in Islamic banking and offers guidelines to resolve it.

Suggested Citation

  • Zubair Hasan, 2008. "Credit creation and control: an unresolved issue in Islamic banking," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 1(1), pages 69-81, April.
  • Handle: RePEc:eme:imefpp:v:1:y:2008:i:1:p:69-81
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    References listed on IDEAS

    as
    1. Hasan, Zubair, 2005. "Islamic banking at the crossroads: theory versus practice," MPRA Paper 2821, University Library of Munich, Germany.
    2. Wachtel, Paul, 2001. "Growth and Finance: What Do We Know and How Do We Know It?," International Finance, Wiley Blackwell, vol. 4(3), pages 335-362, Winter.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Hasan, Zubair, 2008. "Ialamic finance education at graduate level: Current position and challenges," MPRA Paper 8615, University Library of Munich, Germany.
    2. Hasan, Zubair, 2012. "Money evolution and control in the context of current financial crisis with Islamic inputs," MPRA Paper 73532, University Library of Munich, Germany, revised 2013.
    3. Hasan, Zubair, 2008. "Islamic Finance Education At The Graduate Level Current State And Challenges," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 16, pages 1-29.
    4. Kaouther Jouaber & Meryem Mehri, 2012. "A Theory of Profit Sharing Ratio under Adverse Selection: The Case of Islamic Venture Capital," Post-Print hal-01525795, HAL.
    5. 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.
    6. repec:pra:mprapa:39795 is not listed on IDEAS
    7. Hasan, Zubair, 2008. "Islamic Banks: Profit sharing, equity, leverage lure and credit control," MPRA Paper 11737, University Library of Munich, Germany, revised Nov 2008.
    8. repec:dau:papers:123456789/9551 is not listed on IDEAS
    9. Hasan, Zubair, 2011. "Money creation and control from Islamic perspective," MPRA Paper 28366, University Library of Munich, Germany.

    More about this item

    Keywords

    Islam; Banking; Credit control; Fiscal policy;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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