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All Journal Journal of Islamic Monetary Economics and Finance
Omer Faruk Tekdogan
Ministry of Treasury and Finance, Turkey
Economics, Econometrics & Finance

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THE INTRODUCTION OF WAQF INTO FRACTIONAL AND FULL RESERVE BANKING SYSTEMS TO ACHIEVE ECONOMIC STABILITY Omer Faruk Tekdogan
Journal of Islamic Monetary Economics and Finance Vol 6 No 3 (2020)
Publisher : Bank Indonesia

Show Abstract | Download Original | Original Source | Check in Google Scholar | DOI: 10.21098/jimf.v6i3.1132

Abstract

Fractional reserve banking is a system in which banks extend loans by creating credit/deposit money, and which can be considered the basis of modern financial architecture. Nevertheless, it has been criticised because of its inherently weak and fragile structure in terms of financial and economic stability. As a theoretical solution, full reserve banking has been supported in academic circles, with many technical variations. However, Islamic economics can help to maintain financial and economic stability with its original institution of waqf. Besides performing social functions, waqf also undertakes financial intermediary functions and preserved financial stability in the period of the Ottoman Empire. The purpose of this study is to examine the effects of fractional reserve banking on economic stability and to make a comparison with full reserve banking to observe its potential as an alternative solution. The study also examines the efficiency of the Islamic social and economic institution of waqf in maintaining economic stability in both fractional and full reserve systems. The results demonstrate that full reserve banking is a promising approach to maintaining economic stability and that waqf enhances economic stability in both banking systems.
DOES ISLAMIC BANKING PROMOTE FINANCIAL STABILITY? EVIDENCE FROM AN AGENT-BASED MODEL Omer Faruk Tekdogan; Burak Sencer Atasoy
Journal of Islamic Monetary Economics and Finance Vol 7 No 2 (2021)
Publisher : Bank Indonesia

Show Abstract | Download Original | Original Source | Check in Google Scholar | DOI: 10.21098/jimf.v7i2.1323

Abstract

Islamic banking has come to the forefront as being one of the fastest growing branch of the global financial industry in recent years. In this study we evaluate whether coexistence of Islamic and conventional banks promote financial stability. In this respect, we evaluate two types of financial systems: (1) A system solely comprised of conventional banks, (2) a dual system in which conventional and Islamic banks coexist and interact with each other. Accordingly, we design two agent-based models representing aforementioned systems and examine possible contagious effects and causes of bank failures by employing the volatility spillover methodology. We find that Islamic banks greatly promote stability by providing liquidity during financial shocks and create more liquidity per asset compared to conventional banks. We also find that they tend to hold more cash than conventional banks, which cushion the effects of a possible liquidity squeeze. Conventional banks, on the other hand, tend to have reserve deficits, which intensify during shock periods. We conclude that coexistence of both bank types creates a win-win situation and contributes to financial stability.
Co-Authors Burak Sencer Atasoy