THE FRACTIONAL RESERVE BANKING DILEMMA: INSIGHTS AND IMPLICATIONS

Abstract

The study revisits the intricate world of Fractional Reserve Banking (FRB), investigating its historical evolution, operational mechanics, and profound impacts on contemporary economies. The repercussions of money creation and destruction such as endemic inflation, escalating private and public debt, and the creation of economic cycles are explored. The paper further examines the current monetary system and the symbolic relationship between money and debt, challenging notions of interest as well as implications for resource allocation and wealth inequalities. The arguments for and against FRB are discussed, providing a more complex assessment of their compatibility with Islamic banking principles.  Potential reforms with a view to exploring possible alternatives and their consequences are reviewed. In order to give a comprehensive overview of the FRB landscape, we have based our analysis by reviewing literature that is anchored in real-world examples. The research not only contributes to the academic debate on banking systems, but also serves as a basis for discussion of sustainability and equity in monetary frameworks today.