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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.

Suggested Citation

  • Hasan, Zubair, 2008. "Credit creation and control: an unresolved issue in Islamic banking," MPRA Paper 8130, University Library of Munich, Germany, revised 07 Apr 2008.
  • Handle: RePEc:pra:mprapa:8130
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    File URL: https://mpra.ub.uni-muenchen.de/8130/1/MPRA_paper_8130.pdf
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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)

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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

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

    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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