Areas for Further Research & Study
Reform of the Monetary-Institutional Framework In the Islamic Perspective
The present monetary-institutional framework in Muslim countries is the product of an era in which Muslim societies had lost their dynamism and ideological orientation. It is necessary to examine what changes are needed in the existing framework to achieve the goals of an Islamic society. Such an examination may reveal the need for the setting up of some new institutions and the reform of some of the existing institutions. The Islamic financial system is pivoted on equity financing but this has remained a neglected field in many Muslim countries. Stock exchanges, which specialise in dealing in equity issues, are not well developed. Some of the existing practices in stock exchanges may also not be in conformity with SharVah. Very few countries have Investment Trusts. Cooperative financing institutions are also not well developed. It would be useful to study the present monetary-institutional framework in Muslim countries and to suggest measures for reform in the perspective of Islamic teachings.
Mechanics of Credit Creation and its Equitable Distribution in an Islamic Society
The debate whether commercial banks should be subject to 100 per cent reserve requirement or allowed to create credit has gone on among Muslim economists for quite some time. However, the differing views on this issue are not irreconcilable. There is need to carry out an in- depth study to help reach a consensus in the matter. Since the controversy in regard to the legitimacy of credit creation by commercial banks centres mainly on its bearing on distributive justice, this aspect has to be given special attention in further studies on the subject.
Techniques of Islamic Banking
Basic material on the subject is already available. There is need. however, for further work in regard to the operational details of Islamic banking techniques. The financing needs of various sectors differ in content and character. The Islamic banking techniques have, therefore, to be evolved keeping in view the distinguishing characteristics of different forms of productive activities. The principle of profit-sharing, for example, cannot be applied in a uniform, standardised fashion in all sectors. It has to assume different forms in the context of objective conditions in each sector. In evolving different operating procedures, however, care has to be exercised that they conform to the basic philosophy underlying the principle of profit-sharing. Special attention needs to be given to determine as to how the principle of profit-sharing may be applied in practice in financing the needs of small scale agriculture, small scale business and other fields of activities where the accounts are not maintained in accordance with recognised accounting principles.
Indexation of Deposits and Loans
Some Muslim economists feel that indexation of deposits and loans can be used as one of the methods for replacing interest. However, Ulema have generally been opposed to it and have expressed the view that it is not in accordance with the principles of SharVah. Indexation could of course if permissible, be used with advantage in a selective way in situations where there are some practical difficulties in applying the principle of profit-sharing. For example, there is no possibility for the government to borrow from the general public to meet its budgetary deficit on the basis of profit-sharing. However, this could be done on the basis of indexation of government loans. It would be useful to give the question of indexation further thought. This is a field where joint research by Muslim economists and religious scholars is indicated.
Financing the Needs of the Government Sector
Governments do stand in need for borrowing to finance a part of budgetary deficit as taxation beyond a point causes undesirable economic repercussions. It is worth-studying as to how best the borrowing needs of government be met. One possibility is indexation of government loans which has already been mentioned. The other possibility is that the borrowing needs of the government be met through borrowing from the commercial banks or the central bank on interest- free basis. However, different modes of borrowing will have different economic effects. The economic effects of borrowing from the commercial banks will be different in several respects from those of bor- rowing from the central bank. It would be useful to study this matter and to determine whether any criteria can be evolved to serve as guidelines in this field.
Economics of Profit-Sharing
A good deal of literature is already available on this subject. However, there is considerable scope for refining and extending the analysis. It is necessary to give particular attention to the principal determinants of supply and demand for investible resources in an Islamic economy. The consequences of introduction of profit-sharing on the demand for and supply of money have also to be rigorously studied. The interaction between the monetary and real sectors in an interest-free economy has to be traced in all its ramifications. It is also necessary to develop an alternative analytical framework which may suitably replace the familiar IS-LM framework applicable to interest-based economies.
How the Discount Rate for the Purpose of Project Evaluation Should be Calculated in Practice
In theory, it may be convincing that the rate of return on projects of equivalent risk may serve as a discount rate in project evaluation. But how the rate of return is to be calculated, how the risk is to be defined and calculated, how the divergence in the rates of return and risks should be reconciled, are the issues that need to be solved before the concept can be made practicable. The definition of a discount rate for public sector projects is another issue that still needs to be resolved. In theory, social rate of return on capital can be said to be the appropriate discount rate but how this is to be calculated in practice is a subject open for the researchers. The preparation of a Manual of Project Evaluation in Islamic Perspective should also be considered so that it is available for the planners of the Muslim countries for practical use.
Non-interest Pricing of Capital and General Equilibrium in an Islamic Economy
In an Islamic economic framework a positive rate of interest will no longer be available for the pricing of capital goods. The interest rate plays a crucial role in the general equilibrium inter-relations in interest- based economies. It is necessary to develop a general equilibrium framework for an Islamic economy in which interest is non-existent.
Source: Money and Banking in Islam, Ziauddin Ahmed; Munawar Iqabal; M. Fahim Khan. Republished with permission.