TM 4 determinant money supply ch 16 part 4 of 4 (Catatan Prof Kameel)

Summary

The transcript discusses the differences between Islamic and conventional banking systems, focusing on the concepts of money, deposits, and financing. It explains how Islamic banking emphasizes real money, where funds must be kept intact and cannot be used for speculative lending. In contrast, conventional fractional reserve banking allows the creation of money through lending, multiplying deposits via accounting entries. The script explores how investment deposits work in both systems, with Islamic banking emphasizing trust and restriction on withdrawals during project durations, and conventional banks freely creating money through multiple rounds of lending.

Takeaways

• 😀 Fractional reserve banking creates money through deposits and loans. Only a fraction of deposits (e.g., 10%) is reserved, and the rest is used for lending or investment, leading to money multiplication.
• 😀 In fractional reserve banking, money is 'created' as it moves through the system by being deposited, loaned out, and reinvested, resulting in the total money supply increasing.
• 😀 Islamic banking emphasizes that money should be real and tangible. It prohibits creating money through loans or deposits that are multiplied beyond the original deposit.
• 😀 The Islamic banking system follows the principle of 'amanah,' which means trust. Banks act as custodians of deposits, ensuring the funds are only used for permitted investments.
• 😀 Saving deposits in Islamic banking are meant to be kept in the bank for safekeeping and cannot be used for loans or investments without the depositor’s explicit permission.
• 😀 Investment deposits in Islamic banking are used for financing specific projects and are tied up for a set period, with profits shared between the bank and the depositor.
• 😀 Islamic banking prohibits lending money to generate interest. Investments are based on real, tangible assets and are subject to shared risk and reward.
• 😀 In fractional reserve banking, the money supply grows through multiple layers of deposits and loans. For example, depositing $1000 can create up to $10,000 through successive loans.
• 😀 Islamic banking ensures that money used in investments is not circulated or multiplied beyond the initial deposit. The funds are invested responsibly in specific projects with predefined terms.
• 😀 Accounting in both systems ensures transparency through accounting entries. However, in Islamic banking, no new money is created through lending, unlike fractional reserve banking, which multiplies money in the economy.

Q & A

What is the main difference between the Islamic monetary system and the fractional reserve banking system?

The Islamic monetary system emphasizes real money in circulation and prohibits the creation of money through interest or fractional reserve banking. In contrast, fractional reserve banking allows banks to lend out a portion of deposits, creating money in the form of loans and interest-based transactions.

How does the fractional reserve banking system work?

In fractional reserve banking, when a customer deposits money, the bank keeps only a fraction (usually 10%) of the deposit and loans out the rest. This process continues, creating multiple rounds of lending and money creation from the original deposit.

Why is the fractional reserve banking system considered problematic in some financial systems?

Fractional reserve banking is considered problematic because it leads to money creation out of thin air, potentially causing inflation, financial instability, and an excessive build-up of debt. It relies on the assumption that not all depositors will withdraw their money at once.

What does the term 'investment deposit' mean in the context of Islamic banking?

An investment deposit in Islamic banking refers to a deposit made by a customer where the bank can invest the funds in Sharia-compliant ventures. However, the funds cannot be withdrawn until the agreed investment period is over, and the customer shares in the profits or losses.

In Islamic banking, why is it prohibited to use deposited funds for financing in certain cases?

In Islamic banking, deposited funds must be used in accordance with the principles of trust (Amanah). If a customer deposits money for safekeeping, the bank cannot use it for financing unless the customer explicitly agrees to allow the bank to invest the funds in specific projects.

How does the concept of 'Amanah' (trust) influence Islamic banking practices?

Amanah in Islamic banking signifies the trust between the depositor and the bank. Banks are required to safeguard the deposits as they belong to the customers, and cannot use them for financing without explicit consent. This ensures that the bank's actions align with the ethical and moral principles of Islam.

What is the difference between a savings deposit and an investment deposit in Islamic banking?

A savings deposit is a deposit where the bank only holds the money for safekeeping and cannot use it for financing, while an investment deposit allows the bank to invest the money, with the return shared between the bank and the customer according to the terms of the investment.

What is the significance of the 10% reserve in fractional reserve banking?

The 10% reserve in fractional reserve banking is a requirement that banks keep 10% of deposits in reserve and lend out the remaining 90%. This ratio ensures that the bank can meet withdrawal demands while still allowing for the creation of money through lending.

How does Islamic banking prevent money from being created in excess?

Islamic banking prevents the creation of excess money by ensuring that all transactions are backed by real assets or investments. The bank does not engage in money creation through interest or fractional reserve lending, focusing instead on profit-sharing based on actual investments.

What role does the Federal Reserve play in the fractional reserve banking system described in the transcript?

The Federal Reserve in the fractional reserve banking system acts as a central bank that sets reserve requirements for commercial banks. It influences the money supply and banking operations by controlling the amount of reserves that banks must hold, indirectly affecting how much money can be created through lending.