Economics and Finance


Informational Money, Islamic Finance, and the Dismissal of Negative Interest Rates

Authors: Jan A. Bergstra

The so-called Islamic Finance Requirements induce the notion of an IFR-compliant financial system. IFR-compliance provides an axiomatic approach to Islamic finance. In order to deal with potential mismatches between IFR-compliance and Islamic principles, IFR-compliant financial systems are referred to as Crescent-Star finances and IFR serves as axioms for Crescent-Star finance (CSF). Literally following that approach negative interest rates are to be avoided in a Crescent-Star financial system just as well as positive interest rates. W.r.t. Islamic finance Crescent-Star finance may admit false positives, i.e. IFR-compliant models of finance that nevertheless fail to qualify as sound from an Islamic perspective, but there won't be false negatives. A weaker version CSFn of CSF is formulated which formally permits negative interest rates, and a strengthening CSFpls of CSF is defined in which it is always required that profit and loss sharing takes place in connection with lending. It is argued that if only informational money is taken into account, CSFn finance prevents the occurrence of negative interest rates. It is shown that the situation is quite different for physical monies. CSFpls finance excludes negative interest rates as well as positive interest rates.

Comments: 24 Pages.

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[v1] 2015-05-31 12:16:48

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