132 AN INTRODUCTION TO ISLAMIC FINANCE
a situation where money becomes more important as a repository of wealth
than would be the case with more active fi nancial intermediation.
The existence of broad, deep, and resilient markets in which the assets and
liabilities of fi nancial intermediaries can be negotiated is a necessary feature
of supportive money markets. Additionally, to the extent that money markets
lower the income elasticity of demand for cash and fi nance investment proj-
ects, their importance in an Islamic fi nancial system cannot be overlooked.
Even in this system, money markets will enable fi nancial units to be safely
illiquid, provided they have assets that are eligible for the money market. In
this system, too, the basic source of the money in the market is the existence of
pools of excess liquidity. One main activity of money markets in this system is
to make arrangements by which the surplus funds of one fi nancial institution
are channeled into profi t-sharing projects of another. It is conceivable that,
at times, excess funds may be available with some banks, but no assets, or at
least assets attractive enough in their risk–return characteristics, on which they
can take a position. On the other hand, there may be banks with insuffi cient
fi nancial resources to fund all available opportunities, or with investment
opportunities requiring commitments of what the banks may consider exces-
sive funds in order for them to take a position and for which they may prefer
risk sharing with surplus banks. In such a case, the development of an inter -
bank funds market is a distinct possibility. It may also be possible for some banks
to refi nance a certain position that they have taken by agreeing to share their
prospective profi ts in these positions with other banks in the interbank funds
market. Finally, since most of the investment portfolios of banks will contain
equity positions of various maturities, it is also possible that a subset of their
asset portfolios comprising equity shares can be offered in the money market
in exchange for liquidity.
Here, too, effective and viable money markets in an Islamic system will
require active support and participation by the central bank, particularly
at times when the investment opportunities and/or the risk–return com-
position of projects and shortages of liquidity in the banking system may
require a lender of last resort. Such money markets must be fl exible enough
to handle periods of cash shortage for individual banks, based on some form
of profi t - sharing arrangement. The challenge for money markets, as well as
for the secondary markets, in an Islamic fi nancial system is the development
of instruments that satisfy the liquidity, security and profi tability needs of the
markets while, at the same time, ensuring compliance with the rules of
the Shari’ah — that is, the provision of uncertain and variable rates of return
on instruments with corresponding real - asset backing.
EFFECT ON SAVINGS AND INTERMEDIATION
It can be argued that in an Islamic economic system, particularly with its
emphasis on hard work and moderation in consumption, savings would
be enhanced. Moreover, it seems intuitively plausible that since, in normal