Book Review Commercial Banking in the Presence of Inflation By A.L.M. Abdul Gafoor Reviewed By Preeti Nair Inflation has become a fact of life in most countries, but it is a very grave problem in developing countries. As far as commercial banking is concerned, it erodes the value of depositors' savings as well as the banks' loans. Yet the banking system does not explicitly address this problem. Commercial Banking in the Presence of Inflation, attempts to find a way of compensating for the loss of value suffered by capital due to inflation. The book studies various existing measures of inflation and rejects them as unsuitable for measuring inflation on capital with which the present system is based. It also specifies the characteristics required of a measure appropriate to the purpose, and constructs a new index to measure inflation on capital. Banking transactions affected by inflation are identified, and the new measure is used to compute the loss suffered by capital in those transactions. The author explains, in the earlier chapters of his books, what is meant by inflation and how it is measured. The author then describes some popular indicators of inflation, which in turn, are investigated to see if they are appropriate for the task. The author goes on to discuss some contemporary and traditional practices in chapter 4, and based on the findings, a new measure of inflation is developed. It is subsequently tested to see whether it has satisfied the criteria of a good measure developed in the preceding chapters. On finding it satisfactory, ways of introducing it into the modern commercial banking system are explored. In chapter 5, the author goes on to explain the necessary changes which have to be made in order to introduce the newly developed solution into the present commercial banking practices. Some finer technical points of practical importance, including the effect of commercial bank credit creation on the compensation-for-inflation component of the cost of borrowing, are discussed in Chapter 6. Chapter 7 summarizes and concludes the whole point. This new method has special relevance to interest-free banking. For in a conventional system, the interest paid to the depositors may fully or partially compensate for the loss , as the banks may include it in the interest they charge the borrowers. In an interest-free system however, it is a different story, as the depositor will have to bear the full loss. Therefore a method for compensating that loss becomes even more urgent. It is on that account that this book forms the third in a series of three books which, taken together, are expected to provide a comprehensive banking and finance system that addresses the concerns and needs of Muslims today. The other titles are Interest-Free Commercial Banking and Participatory Financing through Investment Banks and Commercial Banking The method presented in this book is a general one, universally applicable to all lending-borrowing operations, and would be able to neutralize the effect of inflation. It is simple and straightforward and thus easy to understand. Born in 1946, A.L.M. Abdul Gafoor, graduated in Physics and Mathematics from the University of Ceylon, Colombo, and continued his studies at the International Center for Theoretical Physics, Trieste, Italy and at the International Centre for Pure and Applied Mathematics, Nice, France. He has taught at the universities of Colombo and Groningen, and has been the Head of Statistics and Computing at Marga Institute, Colombo - a Social Sciences research center. Currently, Gafoor devotes his time to developing a general banking and financial system that is transparent, responsible and inflation-sensitive, with special reference to the needs and concerns of Muslims today. He lives in Groningen, the Netherlands. Title: Commercial Banking in the Presence of Inflation Author: A.L.M. Abdul Gafoor Pages: 116 Publisher: A.S. Noordeen, P.O. Box 10066 50704 Kuala Lumpur (published with the permission of APPTEC Publications, Netherlands) Year: 1999

Published on:15 June 2001