Some reflections and recapitulations on above six papers:
By: Iraj Toutounchian ,Ph.D.
Professor of Economics
Islamic Money and Banking
1- There is no need to be concerned with supply of money as long as factors of production exist. In other words, supply of money is closely tied with availability of factors of production. This will necessarily lead to full employment.
2- In the absence of interest, interest-based loans disappear and banks become “asset” producers. Hence Required Reserve Ratio(RRR) may be confidently brought down to zero. Essentially, there is no need to RRR since supply of money is no tan Islamic bank’s concern.
3- The elimination of interest erodes money whirlpool, as well as any speculative demand for money. This makes Say’s Law a must; hence, full employment.
4- History testifies that rate of profit is much higher than long-term interest rates. In fact, so long as speculation is permitted they never become equal. Therefore, depositors in Islamic banking system will enjoy high rates of profit, however volatile. This will somehow bridge the gap among income strata.
5- Having taken all above points into consideration, least, if any, fluctuation in economic variables is expected within the system.
6- Risk of depositing in an Islamic banking system is less than that of buying a share in stock market. This is due to several factors:
(a) deposits and returns to numerous financed projects are being pooled .Further more, risks of these projects are not of the same kind neither of the same magnitude. It follows that pooled risk is logically expected to be less than that of one individual share.
(b) Two kinds of deposits can be suggested to depositors; one with variable return and the other with fixed return. Both of these, of course, shall be compensated for by the pooled returns of the financed projects.
7- Inflation does not have an adverse effect on the balance sheet of an Islamic bank. This derives from the nature of profit and loss sharing in which the real values of assets and liabilities would move in the same direction in the event of economic shocks. Whereas, in case of conventional banking, the purchasing power of loans decline during inflationary periods. Hence, the Islamic banking protects depositors against any decline in the real value of their (monetary) assets.