The effects of eliminating Riba in foreign currency transactions by introducing global FinTech network

Mohammad Selim

International Journal of Islamic and Middle Eastern Finance and Management, 2020, vol. 14, issue 3, 506-523

Abstract: Purpose - This paper aims to investigate the effects of eliminatingRibain foreign currency transactions.Ribaor interest arises when foreign currencies are bought and sold at different rates. From the Islamic perspective, the difference between the buying and selling rates of foreign exchange will constituteRiba. Also, this paper examines the effects of eliminating suchRibaon major macroeconomic variables. Design/methodology/approach - This study is based on the hadith which imply that if buying and selling rates of currencies or foreign exchanges are same, i.e. if one sells BD1 = Dh10 and Dh10 = BD1 on spot, there will be noRiba. This can be guaranteed if the Islamic banking system introduces the technology, often known as FinTech interest-free foreign exchange bank machines (IFfexBM), which will automatically dispense BD10 for Dh100 and vice-versa, both locally and globally, and it will have tremendous positive effects in the economy. Furthermore, the effects of introducing FinTech for eliminatingRibawill be analyzed on economic and international trade activities by using aggregate expenditure (AE) and aggregate output model within the tenets of Islamic principles. Findings - If Islamic banks (IBs) can introduce FinTech global network system where any client can buy or sell foreign currency at the same rate without any markup, it will increase the market share for IBs by increasing the number of customers and number of branches, and it will increase the inflow of funds and volumes of transactions, especially in international trade, global financial transactions and cross-border shopping. Such an increase in transactions will increase AE and AE will continuously shift up. Such an upward shift will have positive effects on equilibrium output, employment and prosperity. Originality/value - This is, perhaps, one of the latest attempts to eliminateRibafrom foreign exchange transactions by introducing FinTech IFfexBM in each and every locality. Such elimination ofRibawill not only reduce the cost of cross-border transactions but it will also reduce cost in international trade and financial transactions among nations, and therefore, it will have expansionary effects on equilibrium output, employment and global prosperity.

Keywords: Riba; FinTech; Full employment; Foreign currency transactions; Interest-free foreign exchange bank machines; International trade and financial transactions (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-01-2020-0035

DOI: 10.1108/IMEFM-01-2020-0035

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