Inflationary Dynamics of Consumer and Producer Financing – A case of Islamic and Conventional Banking in Pakistan

Abstract

One of the objectives of macroeconomics is to stabilise purchasing power for the masses, which remains a leading economic problem in Pakistan for years. Economists are convinced about the existence of some degree of inflation in the economy to mobilize economic resources, with the condition to keep it to a minimum. Currently, Islamic finance is setting its firm footing in Pakistan and competing with the conventional financial system. Both of these financial systems provide their services to consumers and producers, which implicates inflation differently. Under this scenario, this study sets to compare the Shari’ah compliant financing provided by Islamic financial institutes and human made 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. Quarterly secondary data extracted from the State Bank of Pakistan (SBP) reports and International Financial Statistic (IFS). Empirical results displayed that Islamic consumer financing, as expected in theory, helps to control inflation. The preaching of moderation in Islamic finance makes Islamic consumer financing less inflationary and asset-based Islamic producer financing will perform better in reducing inflation. Islamic consumer financing is well participating in the management of inflation. However, Islamic producer financing lacks inflation curtailing ability. The small share in the financial market, and lack of long term investment plans, are the few reasons why Islamic producer financing is not managing inflation.

Accelerating Industrial Output Growth through Islamic Bank Decomposed Financing Optimization in Malaysia

“…Through consumer financing, bank enables a customer to spend more. Banks provide services such as credit cards, leasing, and overdraft facilities, which create demand for products and services (Manzoor & Arshed, 2021). Furthermore, conventional bank gives discounts on various brands of consumable products such as apparel, food restaurants, and retail shops, which encourages people to spend more money.…”

Nexus between Islamic bank decomposed financing and agriculture output growth in Pakistan

“…Hence they have diverse effects on the economy. The Islamic financial system can eliminate debt financing and improve the efficiency of financial resources (Manzoor & Arshed, 2021). Products offered by Islamic banking can fairly deal with every kind of business, and present several products unanimously for all the sectors of economy.…”

“…According to literature supporting the agriculture sector with PLS schemes by adopting al-musaqa and al-muzara'ah contracts the economic well-being improved in Malaysia. Manzoor & Arshed (2021) investigated the impact of Islamic and conventional bank consumer and producer financing on inflation. The results reveal that Islamic consumer financing participates well in inflation management but Islamic producer financing does not in the context of Pakistan.…”

“…Since the financial sector endorses significantly to growth over time, policymakers should thus consistently but carefully increase financial development. Furthermore, as a prerequisite, the degree of economic regulation and macroeconomic indices, such as inflation (Manzoor & Arshed, 2021), financial sector policies (Arcand et al, 2015), and financial openness (Yasmin & Ayaz Dr, 2023), affect the effect of financial development on output growth. These findings demonstrate the resilience of finance in promoting output growth.…”