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Credit control instruments in a dual banking system: leverage control rate (LCR) – a proposal

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  • Hasan, Zubair

Abstract

Islam banishes interest. This raises two questions contextual to Central Banking. First, can Islamic banks create credit like the conventional? We shall argue that Islamic banks cannot avoid credit creation; an imperative for staying in the market where they operate in competition with their conventional rivals. Evidently, the interest rate policy would not be applicable to them as a control measure. This leads us to the second question: What could possibly replace the interest rate for Islamic banks? In reply, the paper suggests what it calls a leverage control rate (LCR) as an addition to Central Banks’ credit control arsenal. The proposed rate is derived from the sharing of profit ratio in Islamic banking. It is contended that the new measure has an edge over the old fashioned interest rate instrument which it can in fact replace with advantage. It can possibly be a common measure in a dual system.

Suggested Citation

  • Hasan, Zubair, 2016. "Credit control instruments in a dual banking system: leverage control rate (LCR) – a proposal," MPRA Paper 65027, University Library of Munich, Germany, revised 18 Feb 2016.
    • Handle: RePEc:pra:mprapa:65027
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    References listed on IDEAS

    as
    1. Hasan, Zubair, 2014. "Risk sharing versus risk transfer in Islamic finance: revised," MPRA Paper 62826, University Library of Munich, Germany, revised Mar 2015.
    2. Hasan, Zubair, 2014. "Risk-sharing versus risk-transfer in Islamic finance: An evaluation," MPRA Paper 58059, University Library of Munich, Germany.
    3. Hasan, Zubair, 2014. "Risk sharing versus risk transfer in islamic finance," MPRA Paper 62810, University Library of Munich, Germany, revised Mar 2015.
    4. Hasan, Zubair, 1988. "Distributional equity in Islam," MPRA Paper 2785, University Library of Munich, Germany.
    5. Hasan, Zubair, 2015. "Risk sharing versus risk transfer in Islamic Finance: A critical appraisal," MPRA Paper 65028, University Library of Munich, Germany, revised May 2015.
    6. Hasan, Zubair, 2015. "Risk sharing versus risk transfer in islamic finance," MPRA Paper 62847, University Library of Munich, Germany, revised Mar 2015.
    7. Martin Čihák & Heiko Hesse, 2010. "Islamic Banks and Financial Stability: An Empirical Analysis," Journal of Financial Services Research, Springer;Western Finance Association, vol. 38(2), pages 95-113, December.
    8. Mr. Jemma Dridi & Maher Hasan, 2010. "The Effects of the Global Crisison Islamic and Conventional Banks: A Comparative Study," IMF Working Papers 2010/201, International Monetary Fund.
    9. Hasan, Zubair, 2005. "Islamic banking at the crossroads: theory versus practice," MPRA Paper 2821, University Library of Munich, Germany.
    10. Maghrebi, Nabil & Mirakhor, Abbas, 2015. "Risk Sharing and Shared Prosperity in Islamic Finance," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 23, pages 85-117.
    11. Hasan, Zubair, 2009. "Profit sharing ratios in mudaraba contract revisited," MPRA Paper 21843, University Library of Munich, Germany, revised 2010.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Central Banking; Credit creation; leverage control rate. (LCR); Islamic banks; Profit sharing;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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