Islamic Banking's Role in Controlling Inflation
ISLAMIC BANKING’S ROLE IN CONTROLLING INFLATION
ABSTRACT
Inflation has become a fact of life in nearly all countries, but it is a very serious problem in the developing countries. As far as commercial banking is concerned, it erodes the value of the depositor's savings as well as that of the bank's loans. Yet the banking system does not seem to specifically address this problem. This paper makes an attempt at finding a way of compensating for the loss suffered by capital due to inflation. Identifies the transactions in the commercial banking businesses that are affected by inflation, considers several possible ways of counteracting the adverse effects, and then presents one approach as most suitable for implementation. The method presented here is a general one, universally applicable to all lending-borrowing operations, to neutralize the effect of inflation on such transactions. It is simple and straight forward, but requires the Central Bank to play a pivotal role in its implementation. The method has special relevance to Islamic banking. For whereas in a conventional system the interest paid to the depositor may fully or partially compensate for the loss, and the bank may include it in the interest they charge the borrowers, in an Islamic system the depositor will have to bear the full loss. Therefore a method of compensation for the loss becomes even more urgent.
INTRODUCTION
The dual banking system in Malaysia has enabled banks to offer two forms of financing method, the conventional loan and Islamic financing. In recent years, over a period of more than a decade, financial institutions have offered a wide variety of financing facilities from which consumers could choose. It is well known that the main difference between Islamic banks and conventional banks is interest rates (Haron and Shanmugam, 2000). In Islamic banks, interest rates are forbidden and unlawful to be practiced. Therefore, a new solution has to be created in order to
ABSTRACT
Inflation has become a fact of life in nearly all countries, but it is a very serious problem in the developing countries. As far as commercial banking is concerned, it erodes the value of the depositor's savings as well as that of the bank's loans. Yet the banking system does not seem to specifically address this problem. This paper makes an attempt at finding a way of compensating for the loss suffered by capital due to inflation. Identifies the transactions in the commercial banking businesses that are affected by inflation, considers several possible ways of counteracting the adverse effects, and then presents one approach as most suitable for implementation. The method presented here is a general one, universally applicable to all lending-borrowing operations, to neutralize the effect of inflation on such transactions. It is simple and straight forward, but requires the Central Bank to play a pivotal role in its implementation. The method has special relevance to Islamic banking. For whereas in a conventional system the interest paid to the depositor may fully or partially compensate for the loss, and the bank may include it in the interest they charge the borrowers, in an Islamic system the depositor will have to bear the full loss. Therefore a method of compensation for the loss becomes even more urgent.
INTRODUCTION
The dual banking system in Malaysia has enabled banks to offer two forms of financing method, the conventional loan and Islamic financing. In recent years, over a period of more than a decade, financial institutions have offered a wide variety of financing facilities from which consumers could choose. It is well known that the main difference between Islamic banks and conventional banks is interest rates (Haron and Shanmugam, 2000). In Islamic banks, interest rates are forbidden and unlawful to be practiced. Therefore, a new solution has to be created in order to
References: Sadeq, A. H. M. Dr. (1989). Islamic Economics; Some Selected Issues. Lahore: Islamic Publication (Pvt.) Ltd. Al-Farabi. (n.d.). Retrieved January 4, 2008. http://ptta.pl/pef/angielski/hasla/a/alfarabi.pdf Al-Quran: ‘Abdullah Yusuf ‘Ali: Kuala Lumpur. Mahathir Mohamad (1994). The early years, Kuala Lumpur: Berita Publishing Sdn. Bhd. Sadeq, AbulHassan Muhammad Dr. (1990). Economic Development in Islam. Petaling Jaya:Pelanduk Publications. Imran Ahsan Khan Nyazee (2003). Islamic jurisprudence. Petaling Jaya: Academe Art and Printing Services. A.L.M. Abdul Gafoor (1997). Commercial Banking in the presence of Inflation. The Netherlands: Apptec Publications. Shaharuddin, A., & Safian, Y.H.M (2005). Variable rate financing in Malaysian Islamic banking: A jurisprudential analysis. Proceedings of the International Conference in Economics and Finance (ICEF) 2005, 175-181. Haron. S, & Shanmugam, B. (2000). Islamic banking system. Kelana Jaya: Pelanduk Publications.