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Remedy For Banking Crises: What Chicago And Islam Have In Common: A Comment

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  • AL-JARHI, MABID ALI

    (Former Director, IRTI, IDB.)

Abstract

Repeated failure of banks led some economists to believe that the banking and financial system may be suffering from structural problems and is in need of fundamental reform. The Islamic monetary system is known to consider demand and investment deposits as two distinct contracts. Demand deposits are merely loans that are fully guaranteed by banks and must be returned on demand. Investment deposits are given to banks on a profit-and-loss sharing basis. They are clearly associated with risk-taking and have specific maturities which, in principle, are not revocable. Compared to conventional finance, this sounds like narrow banking. Garcia, Marino and Cibils (2000) find similarities between narrow banking and Islamic banking. As narrow banking seems to be an uncommon concept among specialists in Islamic economics, this comment is rather expanded to explain the what and why of narrow banking. The paper concludes that narrow banking bears similarities with Islamic banking. Under narrow banking, the role of investment banks would carry features similar to Islamic banking when the relationship between savers and banks are considered. However, when it comes to financing investment, Islamic banks avoid trading future for present money, while conventional investment banks stick to the interest-based modes of finance.

Suggested Citation

  • Al-Jarhi, Mabid Ali, 2004. "Remedy For Banking Crises: What Chicago And Islam Have In Common: A Comment," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 11, pages 24-42.
    • Handle: RePEc:ris:isecst:0068
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    1. Al-Jarhi, Mabid, 2002. "Macroeconomics: an Islamic Perspective," MPRA Paper 66938, University Library of Munich, Germany, revised 2004.
    2. Khawla Bourkhis & Mahmoud Sami Nabi, 2011. "Have Islamic Banks Been More Resistant Than Conventional Banks to the 2007-2008 Financial Crisis?," Working Papers 616, Economic Research Forum, revised 08 Jan 2011.

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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