In the Memories of Talibaans : Introduction of Islamic Banking in Afghanistan

If we remember the past few decades we can easily remind the sharia imposed by the Talibaans in Afghanistan which is anyhow still in charge in some parts of Afghanistan. President Obama have indicated to leave Afghanistan and meanwhile DAB's (Da Afghanistan Bank) spokeman Aimal Hashoor announced the Afghanistan plans to issue licenses for three Islamic Banks to offer the services comply with the majority of the population's religion.

The Three banks who are seeking to work in Afghanistan are Afghan United Bank, Ghazanfar Bank and Maiwand Bank. CEO of Afghan United Bank Sayed Mahmood ul Hasssan said the products are limited to Islamic Loans.
Government took this decision because it want to expand the Islamic Finance to draw more assets in economy to reduce the nations dependence on the foreign aid and as being the extremist Muslim society the Afghan's will not tend to use the conventional banking. Afghanistan have received nearly $32 billions in terms of international aid since the U.S attack on Afghanistan in 2001.

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Is it the call to another Great Depression?

"The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy."

Milton Friedman

After the financial crises of the 2008 Federal Reserve (C.B of US) injected money to uplift the credit market. Interest rate was cut down which was already been kept low for about a decade. Normally when interest rate are kept low and large amount of capital is injected in the market it leads to inflation, and as it was expected in the case of Federal Reserve’s easy monetary actions. But the symptoms are showing that another economic depression is going to hit the global economy and large economies are going to face deflation.

One of the drastic reasons is that the US economy is facing and unemployment rate of 9.5% and a fuller picture of unemployment shows a full 16.5% is not been paid. Thus inflation is not possible when people have no money to spend and when they have so much debt to pay. The individual saving rate has increased from 2% to 6%. So it will be helpful to individual to pay off their debts but it means less money to get the economy moving.

Meanwhile with all the C.B’s money and assurance, the financial institutes and not willing to lend and the investors are not willing to spend and sitting on the sidelines. They're waiting on a better economy - and the fact that worker productivity has yet to skyrocket (increased productivity is usually a sign that precedes increased hiring) suggests that they may be waiting for a long time.

So as the economies become slower the risk of deflation is increased. In US during June the overall prices (excluding food and energy) was up just 0.9% the slowest increase in last 44 years in US. Federal Reserve had announced to adopt the easy monetary policy as it will continue to buy treasury bills from the market in order to help the economy by keeping interest rate low.

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Monetary policy and the role of Central Bank

The policy with which the Central Bank controls the money supply in the economy is called the monetary policy. As Central Bank reduce the money supply in the market the interest rate increases or the other way we can say that to increase the Market interest rate the Central Bank reduces the money supply. Now the question arises that how the Central Bank do so? The simplest answer to this question is open market operations by the Central bank. In open market operations the central bank purchases or sales the bonds, security and treasury bills‎ in open market to control the money supply and inflation rate. When it purchases the bonds, securities and TB from market the money supply in the market increases and increased money supply leads to lower market interest rates. These lower interest rates or low cost of borrowing encourages the borrowers. As a result the domestic consumption increases this leads to demand pull inflation in the economy. So with the help of tight monetary policy the Central Bank increases the policy rate to control the inflation.

New Monetory Policy by The State Bank of Pakistan

From the beginning of this fiscal year persistent inflation and fiscal problems are resisting the improvement in the Balance of Payment and recovery of the falling economy. Due to uncertainty and worsen economic conditions the gap between national savings and investment has squeezed mainly because of decline in investments. At the same time aggregate domestic demand is exceeding the aggregate supply. Aggregate supply is squeezed mainly due to increased cost of production which is led by energy crises and increase in value of primary inputs. And the external debts has increased to $55.266 billion in January 2010 from $43.141 billion in the corresponding period of 2008, showing a net increase 28 percent in the last two years of the present government. So all this led to worsen inflation in Pakistan and government is not taking appropriate fiscal measures to control this situation. As inflation rate of 11.7% in fiscal year 2010 was 2.7% higher than the announced target of 9.5%. Inflation is projected to remain from 11% to 12% in fiscal year 2011.

To sterilize risks to macroeconomic stability, monetary policy has to take lead for containing aggregate demand pressures emanating mainly from expansionary fiscal position. Therefore, SBP is increasing the policy rate by 50 basis point, i.e. from 12.5% to 13% with effect from 2nd August 2010.