Page 6 - Islamic Finance Practices

Possible causes of convergence can be

detected in many ways such as:

 Fractional banking system: Islamic banks are

set up based on the fractional banking system

where most of the money in the economy is

created by banks when they make loans. The

danger point occurs when too much loan ie

digital money is made out of greed or irrational

exuberance as Allen Greenspan puts it, that

create bubbles in the stock and property

markets and eventually recession, as evident
in the 2007 US subprime crises. The power of

money creation is put in the hands of the

superrich who own the banks, hence the

concern for poorer society is side-lined.

Central banks can put a stop to this powerful

system by requiring the bank to place a

fraction of deposit as cash that serves as a
tool of monetary policy in controlling the

money supply. But often, this is frustrated by

the procyclical behaviour of the commercial

banks that goes against central banking

stabilization policies.

 Deposit-taking banking system: Islamic banks

take deposits to extend financing. As a

deposit-taking entity, it is leveraging on

borrowed funds to make the Although these