Islamic Economics

Islamic Economics

Instability of banking system and its implications for Islamic banking

Document Type : Original Article

Authors
meysam khosravi 1
Hasan sobhani 2
1 Assistant Professor, Faculty of Economics, University of Tehran
2 Professor of the Faculty of Economics, University of Tehran
10.22034/iec.2024.2022230.2713
Abstract
2008 financial crisis shed light on financial stability importance as a central banks goal. The most important strategy of stabilizing of the financial system is regulation and supervision that has improved after each crisis. This paper investigated and elaborated failure roots of this strategy and the challenges that regulator will face. the biggest obstacle is inherent liquidity risk that fractional reserve banking implies.to overcome financial instability many famous and Nobel prize winners Economists suggested departure from fractional reserve system. After that another question arise: what are the implications of this debate for Islamic banking? The second question of the paper. The inherent instability of bank has an important implication for Islamic banking. In response to this question, based on the jurisprudential rule of Ehteram and the goals of Islamic economics, a decision criterion is introduced. Specifically, it seems that one should look for an optimal point between the state of a completely stable banking system (completely in accordance with the rule of Ehteram) and a completely developmental banking system (in line with the goals of Islamic economy) and finally indicators for it is introduced.    
Keywords
financial crisis
financial stability
fractional reserve banking
Islamic banking
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