Document Type : Research Paper

Author

• meysam khosravi

Faculty of Economics, University of Tehran

Abstract

Since the 2008 financial crisis, financial stability has become a central goal for monetary authorities, with bank regulation serving as the primary tool to achieve it. Despite repeated reforms to banking regulations after each major crisis, these measures have failed to prevent the recurrence of banking instability. This article uses a descriptive-analytical approach to argue that the root cause of bank instability lies in the inherent liquidity risk stemming from the economic activities of individuals and their exposure to uninsurable shocks. In the current fractional reserve banking system, this risk is concentrated within banks, amplifying systemic vulnerabilities. Many Islamic economists, recognizing this instability, have proposed a full-reserve banking system as the foundation of an Islamic monetary framework. However, this article identifies critical oversights in such proposals, particularly their neglect of other macroeconomic objectives like price stability and financing economic growth. Economic growth and improving living standards are central to Islamic economics and, as noted by Martyr Sadr (may Allah have mercy on him), represent common goals shared with capitalist economies. These objectives, however, often conflict with the sole focus on financial stability. The article concludes that the unconditional adoption of a full-reserve banking system as the definitive framework for an Islamic monetary system is incomplete. Instead, it proposes a more balanced decision-making framework that integrates financial stability with price stability and the financing of sustainable economic growth, ensuring a holistic approach aligned with the broader goals of Islamic economics.

Keywords

• financial crisis
• financial stability
• fractional reserve banking
• Islamic banking