Islamic Banking does not need to hold reserve since the

application of PLS system

Diah Wistanti Savitri (1406535093)
The Organization of Islamic Cooperation (OIC) defines Islamic Banking as
"a financial institution whose statutes, rules and procedures expressly state its
commitment to the principles of Islamic Sharia and to the banning of the receipt
and payment of interest on any of its operations". Profit-Loss Sharing (PLS) is one
of the key feature in Islamic banking that the role not lending money to clients
but participatin in the businees with clients as a financier. This concept means
there are risk sharing between investor and enterpreneur and there are no return
with guaranteed interest amount.
Conventional Banking with fractional reserve system would have the
ability to draw profits on funds that they have exerted on effort. Assumptions the
money as commodity makes bank reate new money by lending it into existence.
When the banks create money they do not create sufficient of it to repay the
interest on the loan which created that money in the first place. This system
creates a gap between the performance of the real sector and financial sector
because more money that floating around can not describe the condition in the
real sector.
Islamic Banking in deciding to hold or exclude the reserve depending on
what is transaction is used in dealing with debtors. If the saving transaction using
contract wadiah yad dhamanah, bank should have reserve because the money is
only a deposit which can be taken anytime. But if bank use full of PLS system
which is transaction in trust financing, both enterpreneur and bank (include
investor) will share the profits and losses. It is not a problem when bank does not
hold reserve because there are no guaranteed return for investor.
PLS system means investments with financial institutions are not
necessarily speculative. It can be excluded by careful investment policy,
diversification of risk and prudent management by Islamic financial institutions.
An investment under mudharabah contract with bank that does not need to hold
reserve, will reduce the potential demand for credit. Because with no need for
reserve, the funds raised will be optimized for funding productive activity. The
cooperation are built not only in the short term but also in the long term because
the relationship is not just investors-enterpreneur but more than that, which is
trust financing.

So, Islamic Banking should hold or does not need hold reserve is
depending on what kinds of transaction they used. The application of PLS system
does not have to make the banks have a reserve, but if the banks still have
transactions with other contracts that require the bank has a reserve bank
should also have a cash reserve fund at any time if the debtor wants to take their
money.

source :
http://www.lexisnexis.com/legalnewsroom/international-law/b/international-lawblog/archive/2015/11/09/islamic-banking-industry-concept-transactions-andsupervision.aspx
http://www.islamic-banking.com/profit_and_lose_sharing.aspx