by A.L.M. Abdul Gafoor
Inflation has become a fact of life in nearly all countries, but it is a very serious problem in the developing countries. As far as commercial banking is concerned, it erodes the value of the depositor's savings as well as that of the bank's loans. Yet the banking system does not seem to specifically address this problem. This book makes an attempt at finding a way of compensating for the loss suffered by capital due to inflation.
Identifies the transactions in the commercial banking business that are affected by inflation, considers several possible ways of counteracting the adverse effects, and then presents one approach as most suitable for implementation. The method presented here is a general one, universally applicable to all lending-borrowing operations, to neutralise the effect of inflation on such transactions. It is simple and straight forward, but requires the Central Bank to play a pivotal role in its implementation.
The method has especial relevance to interest-free banking. For whereas in a conventional system the interest paid to the depositor may fully or partially compensate for the loss, and the bank may include it in the interest they charge the borrowers, in an interest-free system the depositor will have to bear the full loss. Therefore a method of compensation for the loss becomes even more urgent. It is on that account that this forms the third of a series of three books which, taken together, are expected to provide a comprehensive banking system that addresses the concerns and needs of Muslims today. The other titles are: Interest-free Commercial Banking and Participatory Financing through Investment Banks and Commercial Banks.
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