Tag: PublicChoice

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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