The Difference between Islamic and Conventional Banking : A Basic Macroeconomic Approach

The introduction of this thesis outlines the factors that have strengthened Islamic banking historically and currently. In doing so, the financial crises are examined to explain the lessons learned and the view of ancient Islamic values in the Muslim-dominated world. Within Islamic banking, there are various voices that criticize the debt-driven system. In addition, the social problem of one's identity through historical-colonialist structures is discussed. In view of the growing market, a scientific debate is necessary. 

In the second chapter, the basic framework of Islamic banking is presented in an understandable way, with the difference to conventional banking going beyond the prohibition of positive interest. Different types of accounts are distinguished and the importance of the credit market compared to the stock market is explained.

In the third chapter, the theoretical concept of Islamic banking is translated into a Keynesian macro model. It is the first model of its kind to consider rationing in the credit market as a consequence of shocks. Evidence from the monetary policy of the European sovereign debt crisis is included to highlight the differences between traditional and Islamic banks.

Then, the Keynesian model is extended to a 4-market model to better represent the effects of a homogeneous Islamic economic system. The goods market amplifies the effects of shocks compared to the 3-market model and shows that systems with Islamic banks need to be more regulated.

The fourth chapter uses the New Keynesian macro model to examine long-run consequences of shocks on the economy. The model incorporates assumptions of Islamic banking and shows that boundedly rational expectations can generate higher volatility. A dynamic New Keynesian model is also used to assess the long-run effects. 


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