JEDDAH: A research paper by Abdullah Al-Sulami and Ayman Saleh, published in the Journal of King Abdul Aziz University: Islamic Economics (Volume 39, Issue 3, pages 89–107), argues that Islamic banks lean toward debt-based contracts because of how modern banks create money. A review of the paper was posted on November 12, 2026 by the Islamic Economics Project.
| What | Research paper on Islamic finance, money creation and a reform proposal, with a critical review |
| When | Review posted November 12, 2026 |
| Where | Journal of King Abdul Aziz University: Islamic Economics, 39(3), 89–107; review on the Islamic Economics Project website |
| Who | Authors Abdullah Al-Sulami and Ayman Saleh; review by the Islamic Economics Project |
| Why-How | Authors say fractional reserve banking pushes Islamic banks toward Murabahah and Tawarruq rather than Musharakah and Mudarabah |
For readers who use or follow Islamic banking, the paper asks a basic question: why do many “Islamic” products look so similar to conventional loans?
The authors’ central argument
The paper notes that Islamic banking is dominated by debt-based contracts such as Murabahah and Tawarruq, rather than partnership modes such as Musharakah and Mudarabah. Early Islamic economic thought had promised a move toward risk-sharing and ethical socio-economic development.
The authors do not treat this as an administrative defect or a moral failing of bank boards. They call it a structural inevitability, arguing that Islamic banks operate within a fractional reserve framework and are part of the modern commercial money creation system.
Using a descriptive-analytical method, the paper traces banking history from seventeenth-century English goldsmiths to modern central banking. It contrasts the textbook money multiplier theory with the credit creation theory of banking. According to the authors, banks are not passive intermediaries lending out saved deposits; lending itself creates deposits through double-entry accounting.
The paper cites estimates that electronic deposit money makes up about 97% of the money supply in the United Kingdom and roughly 91% of broad money in Saudi Arabia.
Why debt contracts win, and what the authors propose
Because deposits are treated by customers as cash equivalents, the authors say banks must be strongly risk-averse. Under Islamic jurisprudence, an equity financier cannot demand capital back when an entrepreneur suffers a genuine loss without negligence. Since start-ups often fail, genuine partnerships would expose banks to capital depletion and runs. Regulatory liquidity and capital rules, such as Basel standards, further discourage equity holdings.
The authors conclude that banks therefore turn to fixed-income, collateral-backed contracts, making Islamic banking economically similar to conventional banking despite different legal form. They also dispute describing deposits as Mudarabah or Wakalah investment capital, since in their view deposits act as liquidity buffers rather than funds actually deployed.
On wider effects, the paper cites classical jurists Ibn Muflih and Imam al-Ghazali, who held that issuing money (al-sikkah) is a sovereign responsibility. The authors argue that private credit creation amounts to an impermissible monopoly (ihtikar) and lets private firms capture seigniorage that belongs to the public. They also link it to inflation, rising inequality and a debt cycle in which claims exceed the money available.
As a remedy, they propose separating money creation from financing, drawing on the 1930s Chicago Plan and modern Sovereign Money initiatives. The system would have three parts: a Central Monetary Authority, Payment Network Utilities and Financing Institutions.
The reviewer’s critique
The Islamic Economics Project review calls the paper provocative but identifies several limitations:
- Fixed-return Shariah-compliant instruments serve real purposes, including risk mitigation, predictable cash flows and capital preservation.
- Collateral and debt contracts also address asymmetric information, moral hazard and costly verification, not only money creation. Equity structures would need covenants against moral hazard.
- The paper is descriptive and lacks quantitative or econometric evidence. No country has adopted 100% full reserve banking, and an abrupt shift needs careful thought.
- The review notes that in a Swiss referendum on sovereign money, economists, policymakers and the central bank concluded such a system could cause credit rigidity, higher borrowing costs and reduced policy tools.
- Giving the state control over money creation raises public choice concerns, including fiscal dominance and political patronage, which the paper addresses only briefly in a footnote.
- Treating all fixed-income debt contracts as disguised usury blurs the Shariah distinction between valid sale (bay’) and interest-based lending (riba), although organised Tawarruq deserves scrutiny.
Key points
- Paper by Abdullah Al-Sulami and Ayman Saleh, Journal of King Abdul Aziz University: Islamic Economics, 39(3), 89–107.
- Authors say debt bias in Islamic banking is structural, tied to fractional reserve banking.
- They propose a three-part system separating money creation from financing.
- The review finds the analysis valuable but calls the reform plan in need of careful deliberation before implementation.
In its conclusion, the review says the paper shows how closely debt contracts are tied to the operating limits of fractional reserve banking, while stressing that the reform blueprint carries challenges that must be weighed before any attempt to implement it.
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