Central bank Islamic monetary instruments: A theoretical approach

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Abstract

The purpose of this paper is to propose the Islamic monetary instruments as an Islamic approach for the central banking monetary operation. It is assumed that the central bank may not deal with the uncertain return of the project (asset) and its ultimate monetary policy target is to stabilize the economy by utilizing the excess (idle) liquidity in the economy. This theoretical study benefits the central bank from the assessment of the usage of every proposed Islamic monetary instrument with respected to the monetary operation purposes. The paper exercises four feasible Islamic monetary instruments based on the characteristics of Sharia contract which suit the nature of the current central banking monetary operation. Every instrument is elaborated mathematically to analyze its monetary impact and the possible reaction of depositors. Finally, the paper suggests the deterministic factors to successfully offer such Islamic instruments. The exercises find the unique operation of every Islamic monetary instrument. Based on the monetary impact of each instrument, the central bank can now have an alternative monetary policy based on the Sharia principles and operation. The paper has so far found the feasibility of four Islamic monetary instruments. There might be other Islamic monetary instruments which can be viable to be exercised. To the best of the author's knowledge, this is the first paper trying to exercise the alternative of the Islamic instruments for monetary operation.

Original languageEnglish
Pages (from-to)51-67
Number of pages17
JournalStudies in Economics and Finance
Volume28
Issue number1
DOIs
Publication statusPublished - 8 Mar 2011

Keywords

  • Central banks
  • Financial instruments
  • Islam
  • Net present value
  • Securities

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