THE EVOLUTION OF A FREE BANKING SYSTEM

In this article we reply to George Selgin’s counterarguments to our article «Fractional Reserve Free Banking: Some Quibbles». Selgin regards holding cash as saving while we focus on the real savings necessary to maintain investment projects. Real savings are unconsumed real income. Variations in real savings are not necessarily equal to variations in cash holdings. We show that a coordinated credit expansion in a fractional reserve free banking (FRFB) system is possible and that precautionary reserves consequently do not pose a necessary limit. We discuss various instances in which a FRFB system may expand credit without a prior increase in real savings. These facets all demonstrate why a fractional reserve banking system —even a free banking one— is inherently unstable, and incentivized to impose a stabilizing central bank. We find that at the root of our disagreements with Selgin lies a different approach to monetary theory. Selgin subscribes to the aggregative equation of exchange, which impedes him from seeing the microeconomic problems that the stabilization of «MV» by a FRFB system causes. Key words: Free banking, fractional reserve, monetary equilibrium, credit expansion, economic cycle. JEL Classification: B53, E32, E42, E5, G18, H11, K39, P3, P34. Resumen: En este artículo respondemos a George Selgin, que a su vez respondió a nuestro artículo «Fractional Reserve Free Banking: Some Quibbles». Selgin considera que los saldos de tesorería son ahorros, mientras nosotros nos fijamos en los ahorros reales necesarios para mantener proyectos de inversion. Ahorros reales son ingresos reales no consumidos. Variaciones en los ahorros reales no necesariamente coinciden con las variaciones en los saldos de tesoreria. Mostramos que una expansión crediticia coordinada es posible en un sistema bancario de reserva fraccionaria (FRFB) y que las reservas prudenciales no constituyen necesariamente un limite a la expansión co - ordinada. Discutimos varios escenarios en los que el sistema FRFB puede expandir los créditos sin un aumento previo en los ahorros reales. Todas estas facetas muestran que un sistema bancario de reservas fraccionarias —incluso uno de banca libre— es inherentemente inestable y produce incentivos para imponer un banco central estabilizador. Mostramos que el origen de nuestras diferencias con Selgin está en un enfoque diferente a la teoría monetaria. Selgin es partidario de la ecuación de intercambio que es muy agregada y que le impide ver los problemas microeconomicas que la estabilización de «MV» por parte del sistema FRFB produce. Palabras clave: Banca libre, reserva fraccionaria, equilibrio monetario, expansión crediticia, ciclo económico. Clasificación JEL: B53, E32, E42, E5, G18, H11, K39, P3, P34.

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Money, Banking, and Financial Markets

The Review of Economic Studies ◽

10.1093/restud/rdz051 ◽

2019 ◽

Vol 87 (5) ◽

pp. 2049-2086 ◽

Cited By ~ 2

Author(s):

David Andolfatto ◽

Aleksander Berentsen ◽

Fernando M Martin

Keyword(s):

Central Bank ◽

Financial Markets ◽

Dynamic Model ◽

Banking System ◽

Free Banking ◽

Lender Of Last Resort ◽

Fractional Reserve ◽

Deposit Contracts ◽

Liquidity Insurance ◽

Meaningful Role

Abstract The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997, Journal of Political Economy105, 928–956) model of banking and financial markets with the Lagos and Wright (2005, Journal of Political Economy113, 463–484) dynamic model of monetary exchange—a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable in government money, where the terms of bank deposit contracts are affected by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. Among other things, the model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system.

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The Faith-Based Judeo-Christian-Islamic Foundation of the Prohibition of Interest and the RF (Riba-Free) Banking System

The Art of Islamic Banking and Finance ◽

10.1002/9781118258217.ch2 ◽

2011 ◽

pp. 13-46

Keyword(s):

Banking System ◽

Free Banking ◽

Faith Based

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Interest Free Banking in Ethiopia: Customer Awareness, Satisfaction and Its Role on Economic Development

International Journal of Islamic Business and Economics (IJIBEC) ◽

10.28918/ijibec.v5i1.2566 ◽

2021 ◽

Vol 5 (1) ◽

pp. 48

Author(s):

Debebe Alemu Kebede

Keyword(s):

Economic Development ◽

Banking System ◽

Secondary Data ◽

Employment Opportunity ◽

Annual Reports ◽

Primary Data ◽

Free Banking ◽

Banking Services ◽

Banking Service ◽

The Government

This study is aimed at evaluating the customer’s awareness and satisfaction toward Interest-free Banking and its role on Ethiopia economic development with some selected Commercial Bank in Ethiopia. To achieve the aim of the study the primary data was collected from Customers and Managers of the selected banks by using convenience method through questionnaire and interview. While, secondary data was collected by compiling and summarizing the bank’s Annual reports and Journals. The collected data was analyzed in descriptive and inferential analysis. The finding of the study depicts as low customer awareness regarding Interest-free Banking services except the Interest-free Banking account holders. Further, majority of Interest-free Banking account holders are more or less satisfied with the current Interest-free Banking services provided since, it can potentially serve as an alternative banking channel in filling the gap left unaddressed by conventional banking and economic development in relation to idle monetary resource mobilization and allocation, inviting to use banking system, creating employment opportunity, supporting GDP growth and assisting in stabilizing crisis and arresting inflation. Based on the study result it concluded as Interest Free Banking have its own role on the country economic development through mobilizing the idle monitory resource, allocating the monitory resource, creating employment opportunity, and inviting to the banking system. Therefore, it recommended as the banks should make aggressive promotion on Interest Free Banking services for customers awareness specially those of out of Muslim customers, the government has to support and should give more emphasis to enable Interest Free Banking service, promote Interest Free Banking which can help assist the economy in stabilizing economic crisis and arresting inflation.

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The civil law form of musharakah as an instrument for direct participation of the Islamic bank in capital: A retrospective analysis and modernity

Pravovedenie ◽

10.21638/spbu25.2020.302 ◽

2020 ◽

Vol 64 (3) ◽

pp. 326-351

Author(s):

Anna N. Kuznetsova ◽

◽

Inese Tenberga ◽

Keyword(s):

Economic Development ◽

Civil Law ◽

Banking System ◽

Islamic Banking ◽

Islamic Banks ◽

Free Banking ◽

Muslim Population ◽

Legal Nature ◽

Distribution Of Resources ◽

Conventional Banks

Conventional banks, which operate under the conditions of interest capitalism, no longer dominate the financial sector. In the 21st century, Islamic banks, which provide services on an interest-free basis, have become their main competitors. In recent years, Islamic banking has grown rapidly even though 30–40 years ago it was only a regional phenomenon that could be found in countries with a predominantly Muslim population. The dispersal of capital by scaling a separate interest-free banking segment is now on the agenda of the Islamic world. It is stimulating the growing social demand for a fair distribution of resources within the community, as well as sustaining, at the same time, resilient economic development. However, the activity of Islamic banks remains a poorly studied and understood phenomenon within the circles of Russian legal science. In this article, the authors reveal the legal nature of the participation transaction involving shirkat al’-inan, while attempting to clarify the notion of using musharakah as a form of civil law, derived from shirkat al’-inan, within the Islamic banking system.

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Central Banking in an Interest Free Banking System

Journal of King Abdulaziz University-Islamic Economics ◽

10.4197/islec.9-1.3 ◽

1997 ◽

Vol 9 (1) ◽

pp. 55-67

Author(s):

RODNEY WILSON

Keyword(s):

Banking System ◽

Central Banking ◽

Free Banking

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Banking and Credit Rationing Under the Islamic Republic of Iran

Iranian Studies ◽

10.1017/s0021086200015711 ◽

1992 ◽

Vol 25 (3-4) ◽

pp. 51-65

Author(s):

Mehrdad Valibeigi

Keyword(s):

Banking System ◽

Credit Rationing ◽

Insurance Companies ◽

Iranian Revolution ◽

Free Banking ◽

Islamic Republic ◽

Financial Contracts ◽

Revolutionary Change ◽

Islamic Republic Of Iran ◽

The Revolution

Since the Iranian revolution of 1979, the Iranian banking system and practices have changed significantly. Shortly after the revolution, according to a decree by the Revolutionary Council, banks and insurance companies were nationalized. In 1980 and 1982 legislation was passed to convert all banking practices to Islamic interest-free banking. Despite such significant developments in the Iranian banking system, this area of research has not been given its due attention by the scholars in the field. It is the purpose of this study to describe the process of post-revolutionary change in the Iranian banking system and outline the new trends in credit rationing practices after the revolution.It will be argued here that the Islamization of the banking system did not result in the so-called abolition of interest from the financial system; in practice the banking system continues to pay interest—now called “profit“—to savings account depositors, and standard interest-bearing financial contracts continue to be utilized by the banks under new Islamic terms.

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