Islamic Economics Studies Bi-quarterly Journal

A Critique of the Theory of Interest in Islamic Banking Studies, Relying On the Effect of Money Creation in Determining Interest Rates

Document Type : Research Paper

Authors

1 PhD candidate in Economics, Tehran university, Tehran, Iran.

2 Associate professor, Faculty of Islamic Studies and Economics, Imam Sadiq University, Tehran, Iran.

Abstract

Implication of "Money creation effect on interest rate" is the main question of this paper. To explain the Idea this paper emphasizes on reserve or fed funds market. Money creation-the most important feature of modern monetary system-improved Bowerk and Irving Fisher's natural interest theory to market interest theory that introduced by wicksell and followed by Keynes.
     This paper discusses these orthodox and also Islamic interest theories in brief by analytical method then concludes that determination of interest in real sector that Islamic banking supports, conflicts with accepting money creation. Because money creation that is accepted by Muslim economists; makes reserves market that its rate  not only doesn't have any relation with real sector but also completely determined by money. To consider Islamic theory of interest as a reality explanation, Money creation would be disappeared and natural rate of interest that is determined by real forces would be market clearing rate.  This paper try to help Islamic banking to be a consistent discipline and more realistic.

Keywords

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Islamic Economics Studies Bi-quarterly Journal
Volume 12, Issue 2 - Serial Number 24
May 2020
Pages 1-34