Iraj Toutounchian ,Ph.D.
Professor of Economics
Islamic Money and Banking
reflections and recapitulations on above six papers:
1- There is no need to be concerned with supply of money
as long as factors of production exist. In other words, supply
of money is closely tied with availability of factors of production.
This will necessarily lead to full employment.
In the absence of interest, interest-based loans disappear and
banks become "asset" producers. Hence Required Reserve
Ratio(RRR) may be confidently brought down to zero. Essentially,
there is no need to RRR since supply of money is no tan Islamic
The elimination of interest erodes money whirlpool, as well as
any speculative demand for money. This makes Say's Law a must;
hence, full employment.
History testifies that rate of profit is much higher than long-term
interest rates. In fact, so long as speculation is permitted they
never become equal. Therefore, depositors in Islamic banking system
will enjoy high rates of profit, however volatile. This will somehow
bridge the gap among income strata.
Having taken all above points into consideration, least, if any,
fluctuation in economic variables is expected within the system.
Risk of depositing in an Islamic banking system is less than that
of buying a share in stock market. This is due to several factors:
(a) deposits and returns to numerous financed projects are being
pooled .Further more, risks of these projects are not of the same
kind neither of the same magnitude. It follows that pooled risk
is logically expected to be less than that of one individual share.
(b) Two kinds of deposits can be suggested to depositors; one
with variable return and the other with fixed return. Both of
these, of course, shall be compensated for by the pooled returns
of the financed projects.
7- Inflation does not have an adverse effect on the balance
sheet of an Islamic bank. This derives from the nature of profit
and loss sharing in which the real values of assets and liabilities
would move in the same direction in the event of economic shocks.
Whereas, in case of conventional banking, the purchasing power
of loans decline during inflationary periods. Hence, the Islamic
banking protects depositors against any decline in the real value
of their (monetary) assets.