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Book Review
Commercial Banking in the Presence of Inflation
By A.L.M. Abdul Gafoor
Reviewed By Preeti Nair
Inflation has become a fact of life in most countries, but it
is a very grave problem in developing countries. As far as commercial
banking is concerned, it erodes the value of depositors' savings as
well as the banks' loans. Yet the banking system does not explicitly
address this problem. Commercial Banking in the Presence of
Inflation, attempts to find a way of compensating for the loss of
value suffered by capital due to inflation.
The book studies various existing measures of inflation and
rejects them as unsuitable for measuring inflation on capital with
which the present system is based. It also specifies the
characteristics required of a measure appropriate to the purpose, and
constructs a new index to measure inflation on capital. Banking
transactions affected by inflation are identified, and the new
measure is used to compute the loss suffered by capital in those
transactions.
The author explains, in the earlier chapters of his books,
what is meant by inflation and how it is measured. The author then
describes some popular indicators of inflation, which in turn, are
investigated to see if they are appropriate for the task.
The author goes on to discuss some contemporary and
traditional practices in chapter 4, and based on the findings, a new
measure of inflation is developed. It is subsequently tested to see
whether it has satisfied the criteria of a good measure developed in
the preceding chapters. On finding it satisfactory, ways of
introducing it into the modern commercial banking system are
explored.
In chapter 5, the author goes on to explain the necessary
changes which have to be made in order to introduce the newly
developed solution into the present commercial banking practices.
Some finer technical points of practical importance, including the
effect of commercial bank credit creation on the
compensation-for-inflation component of the cost of borrowing, are
discussed in Chapter 6. Chapter 7 summarizes and concludes the whole
point.
This new method has special relevance to interest-free
banking. For in a conventional system, the interest paid to the
depositors may fully or partially compensate for the loss , as the
banks may include it in the interest they charge the borrowers. In an
interest-free system however, it is a different story, as the
depositor will have to bear the full loss. Therefore a method for
compensating that loss becomes even more urgent.
It is on that account that this book forms the third in a
series of three books which, taken together, are expected to provide
a comprehensive banking and finance 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 Banking
The method presented in this book is a general one,
universally applicable to all lending-borrowing operations, and would
be able to neutralize the effect of inflation. It is simple and
straightforward and thus easy to understand.
Born in 1946, A.L.M. Abdul Gafoor, graduated in Physics and
Mathematics from the University of Ceylon, Colombo, and continued his
studies at the International Center for Theoretical Physics, Trieste,
Italy and at the International Centre for Pure and Applied
Mathematics, Nice, France. He has taught at the universities of
Colombo and Groningen, and has been the Head of Statistics and
Computing at Marga Institute, Colombo - a Social Sciences research
center. Currently, Gafoor devotes his time to developing a general
banking and financial system that is transparent, responsible and
inflation-sensitive, with special reference to the needs and concerns
of Muslims today. He lives in Groningen, the Netherlands.
Title: Commercial Banking in the Presence of Inflation
Author: A.L.M. Abdul Gafoor
Pages: 116
Publisher: A.S. Noordeen, P.O. Box 10066 50704 Kuala Lumpur
(published with the permission of APPTEC Publications, Netherlands)
Year: 1999
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