Essay on The Case Of Islamic Finance System
2. Banks can increase its interest rates so that they can uphold these at the time of difficulty and attractive liability management can be used to solve the liquidity problem. But there is a similar problem that all banks face that is their liabilities mature faster than their assets and this can be overcome by the third option.
3. Debt monetization where banks sell their slow maturing assets to the central bank to raise cash for the fast maturing liabilities. This option is not essential without a cost and banks may set in motion a vicious circle with its own momentum.
According to (Syed, 2009), in case of Islamic finance system, the system is more stable as there is inherent in the matching of assets and liabilities. As we can see the arrangement of assets and liabilities are matched through profit sharing. The liabilities of economic units are fully repaid with an underlying income. The payments of the banks and financial institutions are in the form of dividend which has to be paid only if profits are being received. Any refinancing has to be done on a basis of sharing the income expected to be received from the asset. Hence because of these the threat insolvency for Islamic institution arises only because of poor management or from irrelevant economic factors.
3. The elimination of credit multiplier effect
According to (Ali, 2004)…