REMEDY FOR BANKING CRISES: WHAT CHICAGO AND ISLAM HAVE IN COMMON: A COMMENT

Repeated failure of banks led some economists to believe that the banking and financial system may be suffering from structural problems and is in need of fundamental reform. The Islamic monetary system is known to consider demand and investment deposits as two distinct contracts. Demand deposits are merely loans that are fully guaranteed by banks and must be returned on demand. Investment deposits are given to banks on a profit-and-loss sharing basis. They are clearly associated with risk-taking and have specific maturities which, in principle, are not revocable. Compared to conventional finance, this sounds like narrow banking. Garcia, Marino and Cibils (2000) find similarities between narrow banking and Islamic banking. As narrow banking seems to be an uncommon concept among specialists in Islamic economics, this comment is rather expanded to explain the what and why of narrow banking. The paper concludes that narrow banking bears similarities with Islamic banking. Under narrow banking, the role of investment banks would carry features similar to Islamic banking when the relationship between savers and banks are considered. However, when it comes to financing investment, Islamic banks avoid trading future for present money, while conventional investment banks stick to the interest-based modes of finance.