Money creation in islamic economic system Term Paper

Money creation in islamic economic system - Term Paper Example be achieved, as Muslims perceive an economy to be healthy when its regulations, institutions and operations together with the conduct of the people and the entire society conform to Shari’ah. The part played by money as well as monetary management in the Islamic economy must conform to the structure of the entire economic system that is prescribed by Islam. Even though the Qur’an and the Sunnah, which are the key sources of Islam, do not give any direct or comprehensive direction in regard to managing money, they are clear in their disapproval of interest. Therefore, financial and monetary connections in the Islamic system must be conducted and organized in a way that prologues the use of interest in any manner. Ultimately, this limitation makes monetary management in the Islamic system to be different in a fundamental and critical manner when compared to the conventional capitalist system. The process of money creation by the conventional banking systems is considered as the most dominant undermining aspect in all the contemporary markets (Lippit, 1996, p. 256). Through creating money from nothing and introducing it into circulation, both the central banks and commercial banks have collectively resulted into a succession of speculative bubbles that may be followed back more than three years in the countries of the west. In the case that newly created money is spent on a particular asset like property or shares, the prices of these assets tend to increase naturally. On the other hand, when the banks make a decision to decrease their rates of creating money, buyers will no longer exist in the market and the prices of assets will start reducing. The capability to create money is thus a largely influential political and economic instrument, which is in most cases abused. Two Islamic guidelines function to prevent any form of money creation by the banking system and they i nclude the law of trust and the prohibition of interest. Through the issuance of promises to