Islamic Banking's Role in Controlling Inflation Essay

2786 Words Aug 25th, 2010 12 Pages
ISLAMIC BANKING’S ROLE IN CONTROLLING INFLATION

ABSTRACT

Inflation has become a fact of life in nearly all countries, but it is a very serious problem in the developing countries. As far as commercial banking is concerned, it erodes the value of the depositor's savings as well as that of the bank's loans. Yet the banking system does not seem to specifically address this problem. This paper makes an attempt at finding a way of compensating for the loss suffered by capital due to inflation. Identifies the transactions in the commercial banking businesses that are affected by inflation, considers several possible ways of counteracting the adverse effects, and then presents one approach as most suitable for implementation. The
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Abu purchases a house by applying for Bay Bithaman Ajil (BBA) financing facility from Bank Mukminin Berhad (BMB). The profit rate is fixed at 8% for RM700 until the settlement. Although, it is benefiting for Abu in terms of monthly payment at RM700 but the economy conditions may affect his interpretation about the payment.

Let us assume that during this time, the amount to be reimbursed by Abu is RM700 and it will not change according to interest rates as what would happen with conventional home financing. On the contrary, another borrower, say Ali will find difficulty paying his monthly payment for home loan under the conventional bank, say Bank Riba Berhad (BRB). He pays usually at RM600, but due to inflation, he has to pay at RM900, which is burdensome for him. In contrast, Abu will find it as a good option to choose Islamic home financing because the monthly payment will constant at RM700 which is relatively cheaper. Therefore, by analyzing these individuals, we can justify that Islamic home financing offers fixed monthly payment because it does not change during inflation. Comparatively, conventional home loan offers unfixed monthly payment since it does move parallel with inflation. Table 1 below illustrates how Islamic home financing offers more long term peace of mind to Abu.
Table 1: Home financing/loan
| |Islamic home

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