Impact of Consumer and Producer Financing on Inflation
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Date
2020
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Publisher
UMT, Lahore
Abstract
Background: One of the important objectives of macroeconomics is to stabilise purchasing power, but this inflation has been a major economic problem in Pakistan for years, plummeting to 20.15% in 2008. Most of the economists are convinced about the existences of inflation in the economy to mobilize economic growth while keeping inflation as low as possible but positve inflation is questionable in Islam. Currently, Islamic finance is setting its strong footing in Pakistan viz a vis competing with the conventional financial system. Both of these financial systems provide their services to consumers and producers in the country.
Objective: Under this scenario, this study sets itself to compare the asset-based and shariah complaint provided by Islamic financial institutes and manmade standards of conventional financial institutions. This study explores the effect of consumer financing and producer financing of Islamic and conventional banks on the inflation of Pakistan.
Methods: Secondary data on monthly bases has been extracted from the State Bank of Pakistan (SBP) reports, International Financial Statistic (IFS) and World Development Indicators (WDI).
Results: empirical results display that Islamic consumer financing as expected by theory is helpful in defeating inflation. However, the Islamic producer financing due to being a small portion of the market and lack of favorable surrounding is not performing and has no impact on inflation.
Contribution: To the best of our knowledge there is derth of such kind of study which compares the relationship consumer and production financing of financial institutions on inflation.
Policy Implications: The small share in financial market and lack of long term investment plans are the few reasons why Islamic producer financing is not playing a significant role in managing inflation. As it was expected that the preaching of moderation in Islamic finance makes Islamic consumer financing less inflationary and promotion of asset-based Islamic producer financing will perform better in reducing inflation. Islamic consumer financing is well participating in the management of inflation. It should be promoted by govt. and banks and develop new products by which help in capturing a better share consumer finance market.