Credit creation and control: an unresolved issue in Islamic banking

Purpose – To reopen for discussion the issue of credit creation and control in the area of Islamic banking. Design/methodology/approach – In view of a rapid expansion of Islamic banking in recent decades, the answer to questions whether Islamic banks can create credit like mainstream banks and, if yes, what methods central banks could use to control it in their case is of paramount importance. An overview of the literature on the subject is provided and credit creation process is explained as background material for the discussion. Findings – The literature on the subject is scanty, controversial and inconclusive. One reason seems to be the mismatch between structural design of Islamic banks and the objectives they are supposed to meet. It is concluded that Islamic banks can create credit in the usual manner but central banks will have to design new tools for credit control applicable to Islamic banks. Research limitations/implications – It is not a rigorous analytical exercise as the main purpose of the paper is to reopen an important issue for discussion. It is an opinioned work and presents rather tentative answers to the questions raised. Practical implications – The findings of the paper may have serious implications for the current structure of Islamic banks and the legal framework for regulating their credit creation activities. Originality/value – The paper draws attention to a rather neglected issue in Islamic banking and offers guidelines to resolve it.