Fractional Reserve Banking and Maqasid Al-Shariah: An Incompatible Practice?

Abstract

This paper conceptualises the process, existence and the implications of fractional reserve banking in our present banking system (both conventional and Islamic). It then reasons the conformity of our contemporary Islamic banking, finance and investment institutions towards achieving the objectives of Islamic law (maqasid al-shariah) operating under the FRB framework. The paper uses conceptual and logical deductions from Qur’an and its teachings to show how fractional reserve banking violates the objectives of Islamic law (maqasid al-shariah), therefore it is impermissible in Islamic perspective. The paper also discusses some scholars’ view in support of the system. A measurement tool which is based on the objectives of Islamic law (maqasid al-shariah) parameters will be eventually used to measure empirically the implication of such system (Fractional ReserveBanking) to the society. The paper concludes with the believe and hope that Islamic banking, finance and investment institutions should avoid the system and operate under a monetary system acceptable in Islam that will help attain the objectives of Islamic law (maqasid al-shariah).

Keywords: Fractional Reserve Banking, Maqasid al-shariah, Islam, monetary system and finance

JEL Classification: D63