Tag: Macroeconomics

Islamic Finance and Money Creation: Sharīʿah Issues and a Reform Proposal

Islamic finance without women

The authors argue that the popular money multiplier model mischaracterizes banks as passive financial intermediaries that collect savings prior to lending out a fraction of reserves. Citing modern empirical literature, such as publications from the Bank of England and contemporary monetary economists, the study demonstrates that modern banks generate deposits endogenously. In this framework, lending creates deposits ex nihilo through double-entry accounting rather than by mobilizing pre-existing client savings. The paper documents that bank-created credit money constitutes the overwhelming majority of broad money in modern economies. They cite empirical estimates showing that electronic deposit money represents approximately 97% of the circulating money supply in the United Kingdom. Similarly, they observe that commercial deposit money accounts for roughly 91% of broad money in the Kingdom of Saudi Arabia.

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The Erosion of Value: A Macroeconomic Analysis of Inflation

Modern economies operate on fiat currency, which is legal tender not backed by a physical commodity like gold or silver but by the government that issued it. Because fiat money lacks intrinsic value, its primary distinction is not stability, but the varying velocity of its depreciation. To gain an objective understanding of value, economists often look to hard assets or a basket of goods (a representative sampling of consumer products).

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Capitalism: A Very Brief Introduction

Capitalism is defined by the Cambridge dictionary as, ‘An economic and political system in which property, business, and industry are controlled by private owners rather than by the state, with the purpose of making a profit.’ Following this definition, not every country can be considered ‘capitalist’.

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Stabilizing Purchasing Power of Common Medium of Exchange 

The rate of return for most non-agricultural activities will fall to naught, while the rate of return for farming will soar high. The organized sector, assisted by interest-driven financing, keeps prices of its products and services high by controlling production and employment. Due to the confusion created by the illusion of consistently rising prices, commoners fail to respond effectively.

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Some Observations on User Cost of Capital

Interest based financial system discourages investment in socially optimal profitable projects, but which are not favored because of relative cost comparison from the market interest rate. If sales do not increase, it may lead to business cycle fluctuations with unplanned increase in inventories. With increased pressure to service debt, the environmental degradation and human resource exploitation may become common and secondary concerns.

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Consumption Smoothing – An Islamic Economics Perspective

It is an empirical observation that people desire to have smooth consumption throughout their lifetimes. Lifecycle consumption hypothesis (LCH) and permanent income hypothesis (PIH) try to explain that in micro-founded framework. Both negate the Keynes assertion that average propensity to consume (APC) falls as income rises. Some micro-economic evidence is also broadly consistent with LCH and PIH, at least in advanced economies.

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Production Function in an Islamic Economic Framework

With higher levels of investment, circulation of wealth and competitive markets, innovation and quality enhancement will be the only means of sustaining the edge for firms in an Islamic economic framework. Hence, there will be more focus on innovation, customer satisfaction and hence speed of innovation and productivity is expected to increase. The supply side of innovation, which is the human capital, will also be incentivized through employment creation as a result of removing concentration and idleness of wealth.

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