The Significance of Participation Finance Sector in Inflationary Economies

The Significance of Participation Finance Sector in Inflationary Economies

Having recently become a global crisis in many societies, including the economies of developed countries, the term inflation can be defined as the rate of increase in the general level of prices. Looking at the inflation data for the end of 2021, it is obvious that even the strongest economies are in the whirlwind of this phenomenon. 

In the minutes of the most recent meeting of the US Federal Reserve (the Fed), Federal Open Market Committee (FOMC), held on January 25-26, 2022, it has been stated that in case the inflation risk keeps rising and the trend continues, the Central Banks will take a steep path in terms of interest rate increases, which is one of the most important market regulatory duties in their hands, and they will not be hesitant in increasing interest rates. Currently, inflation in the USA, the largest economy, has been announced as 7.50%, reaching its peak of the last 40 years. 

Inflation is at the forefront of the economic issues that have become the main agenda item that has been frequently discussed in our country lately. According to the most recently announced data (2022/February), the record level of recent times has been achieved with inflation of 48.69%. 

Annual Inflation Rates by CPI Main Expenditure Category (%), (January 2022)

When January 2022 inflation data is analyzed on the basis of subgroups, it is seen that the inflation rate in transportation, food and non-alcoholic beverages, household goods, restaurants, and hotels is above the median value of 48.69%. In our country, where the number of minimum wage workers in the total workforce is around 45%, corresponding to approximately 17 million, the so-called "household inflation" experienced by the low and middle-income group is at much higher levels. 

Inflation may bring many economic, sociological, and psychological problems. In inflationary economies, visible deteriorations and misconducts are experienced in the pricing behavior. In addition, it can be seen that social corruption and crime rates are higher in inflationary environments. At the same time, it can turn into an issue where new generations become more pessimistic and look to the future without hope. 

An important point to be touched upon at this stage is that this is not unique to our country, as mentioned at the very beginning, and that there is an inflationary environment on a global scale. The existence of global inflation and the methods to combat this inflation are frequently mentioned in the minutes of the Fed and in the recent statements of the President of the European Central Bank, Lagarde. For this reason, it should be kept in mind that the problem is a global problem rather than approaching it in an ideological way, and solutions should be sought by all economic units in a constructive manner. 

Banking is one of the sectors that may have both a positive and a negative impact on inflation. In terms of Participation Banking, the management of loan mechanisms and the transfer of resources to the right place are among the most significant issues. In a murabahah-based system, even though the buyer and the seller are clear, it is also essential that these parties have a commercial relationship between them. Thus, the flow of resources gains a nature that contributes to the country's economy. By allocating funds to their customers through financial products such as murabahah, mudarabah, ijarah, and salam, participation banks serve economic values such as investment, employment, and export rather than an inflationary environment. In the conventional banking system, on the other hand, an environment is created in which loan channels are used without any questioning whatsoever, which may lead to inflation as a result. A banking system that only aims at "Selling Money" for profitability will of course increase consumption rapidly and cause exorbitant increases in prices due to supply-demand imbalance. As a result, record amounts may be experienced in the general level of prices, which is called inflation. 

Let us think of a skilled chef who has many ingredients at his disposal. If this Chef needs salt, he will use salt in his food, and if he needs spice, he will use spices in his food. Everything takes place in moderation and if the chef is a good one, it is likely that a delicious product will emerge. However, the food prepared by a chef who uses all the spices in his meals and is in a hurry to use more, just because he has them at hand, will be tasteless and wasted.

In a scenario where we consider every bank in our country as an economic chef, banks are good chefs, and if they can improve their skills in presenting their products to which segments at what proportion, they will have positive effects on inflation. A banking system that offers financial consultancy to its customers and markets products according to their needs will add value to economic activity. While building their activities upon this slogan, Participation Finance institutions actually avoid wasting resources by making a positive impact on the inflationary environment.

Ahmet Necip Demir  

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