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Credit creation and control: an unresolved issue in Islamic banking

Credit creation and control: an unresolved issue in Islamic banking Purpose – To reopen for discussion the issue of credit creation and control in the area of Islamic banking. Design/methodology/approach – In view of a rapid expansion of Islamic banking in recent decades, the answer to questions whether Islamic banks can create credit like mainstream banks and, if yes, what methods central banks could use to control it in their case is of paramount importance. An overview of the literature on the subject is provided and credit creation process is explained as background material for the discussion. Findings – The literature on the subject is scanty, controversial and inconclusive. One reason seems to be the mismatch between structural design of Islamic banks and the objectives they are supposed to meet. It is concluded that Islamic banks can create credit in the usual manner but central banks will have to design new tools for credit control applicable to Islamic banks. Research limitations/implications – It is not a rigorous analytical exercise as the main purpose of the paper is to reopen an important issue for discussion. It is an opinioned work and presents rather tentative answers to the questions raised. Practical implications – The findings of the paper may have serious implications for the current structure of Islamic banks and the legal framework for regulating their credit creation activities. Originality/value – The paper draws attention to a rather neglected issue in Islamic banking and offers guidelines to resolve it. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Islamic and Middle Eastern Finance and Management Emerald Publishing

Credit creation and control: an unresolved issue in Islamic banking

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
1753-8394
DOI
10.1108/17538390810864269
Publisher site
See Article on Publisher Site

Abstract

Purpose – To reopen for discussion the issue of credit creation and control in the area of Islamic banking. Design/methodology/approach – In view of a rapid expansion of Islamic banking in recent decades, the answer to questions whether Islamic banks can create credit like mainstream banks and, if yes, what methods central banks could use to control it in their case is of paramount importance. An overview of the literature on the subject is provided and credit creation process is explained as background material for the discussion. Findings – The literature on the subject is scanty, controversial and inconclusive. One reason seems to be the mismatch between structural design of Islamic banks and the objectives they are supposed to meet. It is concluded that Islamic banks can create credit in the usual manner but central banks will have to design new tools for credit control applicable to Islamic banks. Research limitations/implications – It is not a rigorous analytical exercise as the main purpose of the paper is to reopen an important issue for discussion. It is an opinioned work and presents rather tentative answers to the questions raised. Practical implications – The findings of the paper may have serious implications for the current structure of Islamic banks and the legal framework for regulating their credit creation activities. Originality/value – The paper draws attention to a rather neglected issue in Islamic banking and offers guidelines to resolve it.

Journal

International Journal of Islamic and Middle Eastern Finance and Management – Emerald Publishing

Published: Apr 4, 2008

Keywords: Islam; Banking; Credit control; Fiscal policy

References

  • Government debt and credit creation: a study of the creation of credit and its effect on the British economy
    Economic Research Council
  • Mudarabah as a mode of financing in Islamic banking: theory, practice, and problems
    Hasan, Z.
  • Islamic banking at the crossroads: theory versus practice
    Hasan, Z.
  • Creditor rights and credit creation by banks in transition economies
    Hoshi, T.
  • Banking Without Interest
    Siddiqi, M.N.