To be honest, that makes more sense to me than fractional reserve banking.... Not sure about the rest of it tho. Very interesting read tho, thanks Julie.
aren't we under ZIRP of the world Negative interest, paying a fee so that you money are stored away from you are not violating Sharia Law. Charging interest lending out money is prohibited. Dealing in gold as property is good practice. under Islamic Banking, they do charge finder fees and forms fees etc but once they are registered company under their respective central bank, most likely they are fractional reserve banking and does not practice gold banking and paper money vs gold. Just how see it.
Max Faber would have disagreed but he was a rather narrow minded little turd riding an anti-Catholic ticket in Prussian dominated Germany. https://en.wikipedia.org/wiki/The_Protestant_Ethic_and_the_Spirit_of_Capitalism The origins do back further to renaissance Italy in actuality particularly the rise of the Medici banking family. When population and raw materials and energy are available a monetary base that is adequate and responsive is essential. Fractional reserve banking has a lot of merit in a growth scenario where the underlying factors support rapid economic growth and support an overall rise in wealth. Think of it as market responsive Keynesianism that functions to increase money supply when growth conditions exist. In an expansionary environment that needs greater money supply under the gold standard (which limited money supply) fractional banking provides the economic need or an increased monetary base. This is why for example a gold backed currency would have been a disaster in China from 1990 to 2005. What happens when growth conditions do not exist or indeed money supply is increased by the state unilaterally to 'stimulate' in a contracting economy. Well in those cases fractional reserve banking has no function but without interest rates there could be no state control of monetary supply (perhaps a good thing). What is best for one circumstance (a valid and genuine growth scenario) is not necessarily best for a different scenario (limited opportunity for growth due to limited population and raw materials and energy) The major problem with sharia finance is that is acts to impose the religious decisions of one group over another e.g. no funding for your pork farm or brewery. It is therefore fundamentally and diametrically opposed to a free market. The success of sharia finance recently is not due to it having any underlying efficiencies or reflecting any economic development but rather an influx of capital derived from the fairly arbitrary geographical location of oil reserves. Usury was actually prohibited in western societies quite widely, and was rapidly discarded as a social prohibition when the theological state became obsolete. Sharia finance is already meeting this reality. Like wahhabism or Shia fundementalism it will rapidly die or morph into a clone of western financial practise when oil reserves in sharia states deplete because it offers nothing of advantage and its recent rise is due to a capital base derived from a crude single commodity export economy, a model that has always been one that results in poverty. See Ghana and the groundnut.
If you look at the GFC period and compare Western financial institutions and Islamic financial institutions, the Islamic ones came out with barely a scratch. Western finance works on a debt based model, whereas Sharia finance operates on an equity based model. There are still Islamic banks and they still make money for providing services, but it all works on shared risk/shared reward so they tend to be a lot more stable (e.g. like during the GFC).
This is a good documentary called "The Ascent of Money" :- [youtube]http://www.youtube.com/watch?v=fsrtB5lp60s[/youtube] It covers the history of the Medici family, the illegality of usury (charging interest) in the older times and the birth of "modern banking". It puts into context some of the historical stigma still attached to the Jewish peoples today. Clearly fractional reserve banking has a role to play when there has been economic repression but it seems to me that it has been followed to its illogical conclusion and now is being abused to the point where it is playing its part in creating another form of economic repression. Surely there has to be some sort of compromise that can give us the best of both systems.
This is an extremely good read, I highly recommend it. The Medici: Godfathers of the Renaissance by Paul Strathern
They just call it "profit rate" instead of interest rate and they are done with it. Almost the same thing.
That is why the results in sharia investment instruments nearly always mirror the ones in western finance instead of showing much difference.
