Towards an Islamic financial system

Abstract

A developed and efficiently operating financial system is indispensable for an expanding economy. It serves as the hub of the overall economic system by facilitating the transfer of financial resources from surplus units to deficit units. The easy transferability not only ensures liquidity for holders of financial assets, thereby reducing the volume of idle balances in the economy but also enables the optimum use of savings for long-term productive activity. It thus helps sustain prosperity at a higher level. What is therefore important for the efficient operation of a financial system is the use by one party of the liquidity held by another. However, the purposes for which the liquidity is used and the machanism through which this takes place are also questions of crucial importance, because the answers to these questions determine in essance the overall efficiency of the financial market in helping actualise the goals of an econoy.