How Islamic banking narrows the gap between the rich and poor

Islamic banking narrows the gap between the rich and poor in three ways:

First: Stable Prices, Second: Full Employment, and Third: Enjoyment of bank depositors from (higher than interest) profit income through PLS. This in turn provides equitable distribution of income; the cornerstone of sustained growth and development.

Capitalistic system has long been unsuccessful to simultaneously attain full employment and stable prices due to existence of interest (rate), development of money market and, consequently, speculation. In other words, in such a system necessary condition to maintain full employment, i.e., the equality of saving with investment is absent. This is because part of saving will go to money whirlpool and hence Say’s law cannot hold. It can be logically demonstrated that the root cause of inflation is saving gap which produces excess demand (via income earned in the money whirlpool which brings about inequitable distribution of income) and excess demand, in turn, brings about inflation.

In brief, Islamic banking (especially through its principal pillar, PLS, its end results of zero opportunity cost of capital, and disappearance of speculation) seems to offer solution to the apparently incompatibility of simultaneous full employment and stable prices, for which Western economists have long strived to find remedies.

Source: Prof. Iraj Toutounchian, Competing IRRs in Islamic Banking and Zero Cost of Capital. Republished with permission.
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