ABSTRACT
Today, it is a well-known fact that banks create money out of nothing by simply extending loans on deposit accounts. Economics textbooks cover this topic while describing multiple deposit creation and fractional reserve banking. Many economists, including Islamic economists, have been criticizing money creation by banks because of its adverse effects on the economy and social justice. The debate revolves around conventional banks; however, Islamic banks have been kept away from this debate. There is a common fallacy that Islamic banks cannot, or do not, create money just like a conventional bank because their transactions should be backed by some real assets. Islamic banks do create money when they give loans, in the same way, that conventional banks do. In this paper, the money creation process of Islamic banks will be clarified, and its economic consequences will be analyzed. Finally, this chapter ends with discussions about full reserve banking as the debatable alternative solution to banks’ money creation.
