Impact of Fractional Reserve Banking System on the Ownership Structure of Economy

Abstract

After the recent financial distresses, extensive debate is being made on the modes of financing and Islamic modes of financing is being emerged as an antidote. This study discussed that it is the nature of money not the modes of using it, which causes distresses. Current monetary system is based on the fiat money and hence on fractional reserve banking which has serious implication to the ownership structure in economy. To analyze this phenomenon, the sample of 25 banks has taken from Karachi stock exchange 100index for the period of 2008-2012. In panel data analysis, the study used the linear regression and correlation coefficient models to find relationship between the variables. It is found that money expansion through credit creation leads to inflation and nonperforming loans which affects the ownership structure in the economy.