Negative Interest Rate

Presented By:
Mr. Aijaz Ali Khowaja
1 Student of Management Science
Sindh Madressatul Islam University
Karachi – Pakistan
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Negative Interest

Basically negative interest rates is a theory in which borrower is

credited his account with interest rather than borrower paying interest
to the lenders.
It is very unusual scenario, it is usually occurred in the time of deep
economic recession when monetary efforts and market forces have
already pushed interest rates to their nominal zero bound.
Normally, central bank will charge on bank reserves of commercial
bank in the form of nontraditional expansionary monetary policy
rather than crediting commercial banks with interest payment.
Monetary policy used this extraordinary tool to intensely encourage
loaning, spending, and investment rather than hoarding cash, which
will lose value to negative deposit rates.
individual depositors will not be charged negative interest rates on
their bank accounts.
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Stagflation / Inflationary Recession

The word “stagflation” is the amalgamation of stag plus flation, stag

taking from stagnation and ‘flation’ taking from inflation.

In this situation nation’s experiences stagnation or unemployment

along with a high rate of inflation therefore called inflationary
recession.

The level of stagflation can be measured by the Misery Index which is

a combination of the unemployment and inflation rate measured by the
price deflator for GNP.

Stagnation generally combination of high inflation, steadily high

unemployment rate and a slow economic growth rate.
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Monetary Policy

The Central Bank usually increases / decrease interest rates

when inflation is predicted to rise / fall to the inflation target.

Higher interest rates tend to moderate economic growth and

lower interest rate tend to higher economic growth.

Higher interest rates increase the cost of borrowing, reduce

disposable income and therefore limit the growth in consumer
spending.

Low-interest rates encourage business and personal borrowing

because the cost of borrowing money is less expensive.
Businesses borrow to finance new plant and equipment, new
hires and expanded inventory
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Interest Based Monetary Policy
In interest based Capitalist system, monetary policy (MP) has
become mostly ineffective in increasing output, and
employment in recent years.

Recession in the form of low or even negative growth rates of

real GDP and high unemployment rates have set in and there
are no signs of robust recovery in many of the capitalist
economies.

Today, conventional expansionary monetary policy appears to

be creating more adverse effects than increasing real output
and cutting unemployment rates.

Unfortunately, such interest based tools of monetary policy

may not achieve the goals of attaining full employment and
controlling inflation.
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Interest Free Monetary Policy

Interest free monetary policy (zero and negative interest rate) has twisted
lots of attention in latest years.
To recommence the economy and combat the deflation, mostly central
banks followed the zero interest based monetary policy.

An interest free monetary policy has thoughtful and optimistic effect on

investment spending, consumption spending and aggregate expenditure
which increase output, employment and income.
An increase in output removes shortages and excess demand and thereby
stabilizes the price level.

interest free monetary policy reduce the overall cost of financing, resulting
in a rightward shift of the aggregate supply curve, and thereby increase in
real GDP gross domestic product and reduce the price level.

Interest free monetary policy must be followed and extended till

economy looks the view of weak aggregate demand
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Concept of Interest Free Monetary Policy

Formation of Interest free monetary policy concept is derived

from the Quran and tradition of Prophet Muhammad Pease by
Upon Him and works as interest free loaning like Qard Al
Hasan (QH).

It is practical application will not only maximise the economic

benefits and well being in this world but will also bring great
success in the hereafter.

Allah, may he be exalted, promised bountiful rewards for QH

in the following verses in the Quaran “Who is it that would
loan Allah a goodly loan so he may multiply it for him many
times over? And it is Allah who withholds and grants
abundance, and to him you will be retured.
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Comparsion of IFMP & IBMP
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Impact of IFMP on IBMP
Thetotal sample of 23 countries was divided into 2 groups. In
Group X, 11 developed capitalist countries pursued IBMP,
while in Group Y, 12 developed capitalist countries followed
IFMP.

Misery index (MI) is used as a measure of economic

performance and for testing the relative economic
performance of Groups Xand Y byusing t-test at the 5 percent
level of significance.

The test results reveal that Group Y, where IFMP has been
followed, has relatively lower inflation and unemployment
rates than Group X.

Therefore, Group Y has a lower MI and performs better than

Group X, which has been pursuing IBMP
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Conclusion

Both groups consist of developed capitalist countries with

similar levels of development, sophistication and per
capitaincome.

These countries have pursued IFMP for more than a year and
are doing much better than those countries which have
pursued IBMP.
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THANK
YOU !