Monetary Policy & Monetary Regime in an Interest Free Economy: An Alternate Approach in Monetary Economics Amidst Great Recession
Salman Ahmed Shaikh
Institute of Business Administration; IBA Karachi
January 14, 2010
This paper reviews limited, but precious academic literature on central banking and monetary management in Islamic finance. It discusses the building blocks of an Islamic monetary system. It discusses how savings would feature despite discontinuation of interest, how inflation will be checked with central banks not having at its disposal conventional OMO, how liquidity will be managed in banking sector when central bank wants to inject liquidity or mop up funds. How and to what extent the institution of Zakat would enable the government to meet its fiscal targets and does not crowd out private sector. How balance of payments and exchange rate stability can be managed in an interest free economy. If in the short term, the government or central bank needs alternative source of revenue other than Zakat, they can issue GDP linked bonds. This could replace T-bills and provide a base instrument for OMO and liquidity management in the banking and financial sector.
Number of Pages in PDF File: 15
Keywords: Islamic corporate finance, pricing of capital, interest free finance, Interest, Interest free economy, Usury, Time value of money, Riba, Musharakah, Mudarabah, Ijara, Salam, Istisna, Qard-e-Hasan, Diminishing Musharakah
JEL Classification: E42, E52, E65working papers series
Date posted: January 17, 2010
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