From Goldsmiths to Modern Banking: A Frank Look at the Money-Creation Process and its Relevance to Islamic Banking

Abstract

This paper discusses the role interest has played in the modern financial system, highlighting the money creation process in particular and the key questions that arise within Islamic Finance as a result. The paper contends that the legalisation of interest built the foundations for much of our modern day financial architecture with the modus operandi of commercial banking being its central element. As a result, money today is mainly created as interest-bearing debt with a host of associated consequences. Among these are an artificial economy of scarcity, endemic debt pressure, constant inflation, wealth polarisation, an ever present risk of default, and the environmentally irreconcilable paradigm of perpetual growth. Consequentially the interest-based modern financial system has seemingly set the world on a path necessitating an incessant demand to privatise, commoditise, and monetise ever increasing amounts of the earth’s resources, causing us to live in an age where finance, energy, health care, and the ecosystem are reportedly headed towards imminent collapse. The question for Islamic finance practitioners is whether their discipline as currently practiced is actually providing a solution towards tackling these crises, or whether it is instead normalising the problems within an “Islamic” framework.