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Islamic money creation.

The global financial crisis has raised a variety of questions regarding the banking industry. It has also unleashed a rethinking momentum that has not spared the very model of capitalism that we live with today. The recent sovereign debt crisis in the Eurozone has reinforced the need to reassess and reinvent the financial architecture that underpins money and money creation. Indeed, the current model used to create and inject money is the very root of the problem we face.

The principles of Islamic finance can contribute a great deal to the rebuilding of our financial system. However, we should distinguish the principles from the industry as it exists today. Simply put, the Islamic finance industry is very young, and currently operates within a broader conventional framework. A quick survey of the Islamic world would reveal that money creation, to date, is still based on a conventional equation. In other words, in the Islamic world, money creation and issuance still follow conventional non-Islamic methodology.

This is revealing as it indicates that the principles of Islamic finance have not yet been applied to the very process of money creation and issuance. In other words, the plethora of Islamic financial products that are approved as Shariah-compliant face an important paradox. If money is not created based on Islamic finance principles, i.e., if the money earned is not Shariah-compliant, what is the value proposition of a Shariah-compliant product?

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Publication:Islamic Banking & Finance
Date:Feb 20, 2011
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