Download What Is a Bank, and How Do We Go About

What Is a Bank, and How Do We
Go About Regulating It?
Haider Ala Hamoudi
University of Pittsburgh School of
Law
What Do Banks Do?
• Provide maximum liquidity to depositors
• Reserve source of credit
• “Transmission belt” for monetary source of
policy
How Do They Do It?
Use of Economies of Scale to:
• Manage liquidity mismatches
• Address information asymmetries as between
their depositors and their debtors
Why Do We Need Banking Regulation?
• Market wide dangers in light of liquidity
mismatches (i.e., run on banks generally)
• Effect on broader economy when reserve
source of credit and liquidity taken away
• Lose transmission source for monetary policy
The Idealized Form of the Islamic
Bank:
The Two Tiered Mudaraba
Depositors
Bank
Portfolio
As Idealized Form . . .
• Cannot use “bank model” to serve unique
functions of bank
– Liquidity harder to manage
– Informational asymmetries not as easy to address
in this model either (monitoring costs)
– Do not serve as transmission belt for monetary
policy
Reality of Islamic Banks
• On Portfolio side, emphasis is overwhelmingly
on investments that in legal and economic
terms resemble debt, bringing model much
closer to “bank” and much more able to
engage in sensible liquidity management
– Synthetic Murabaha
– Tawarruq
– Sukuk
– Ijara
Problem
• These “debt-like” instruments are almost
always justified as necessary compromises in a
debt driven financial world, not as ideal
solutions. The idealized model, equity based
and involving “risk sharing”, remains largely
unchanged.
• Points to an underlying and pervasive tension,
between what is and what ought to be.