Central Banking and Monetary Management in Islamic Financial Environment

Journal of Independent Studies & Research, 27(2): 11-27 (2010)

12 Pages Posted: 18 Nov 2010 Last revised: 15 Jan 2017

Date Written: November 15, 2009

Abstract

Continuous growth in Islamic finance calls for an in-depth study of the framework in which the monetary policy maker (i.e., the central bank) performs its functions. Central banks in Muslim countries are using various instruments for monetary policy purpose including interest rate. As a result, Islamic Financial Institutions (IFIs) are facing issues in benchmarking the price of financial instruments. Acceptable solution to benchmarking lies in the presence of a real economic activity in the base of any proposal and its feasibility for business performance when put against conventional banking. This paper presents empirical evidence of statistical equivalence of nominal GDP growth rate and official interest rate for ‘advanced,’ ‘all,’ and some Muslim countries. We propose nominal GDP growth rate as benchmark for pricing domestic financial transactions of IFIs as well as for pricing external bilateral/multilateral loans. The paper also suggests nominal income targeting as monetary policy regime and provides a liquidity management mechanism for banking system in Islamic financial environment.

Keywords: Islamic Economics, Islamic Finance, Islamic Banking, Central Banking, Nominal Income Targetting, Monetary Policy

JEL Classification: E58, G12

Suggested Citation

Hanif, Muhammad Nadeem and Shaikh, Salman Ahmed, Central Banking and Monetary Management in Islamic Financial Environment (November 15, 2009). Journal of Independent Studies & Research, 27(2): 11-27 (2010). Available at SSRN: https://ssrn.com/abstract=1709368

Muhammad Nadeem Hanif (Contact Author)

State Bank of Pakistan ( email )

I.I. Chundrigar Road
Karachi, Sindh 74000
Pakistan

Salman Ahmed Shaikh

Szabist, Karachi ( email )

90 and 100 Clifton
Karachi, Sindh 75600
Pakistan
92-111-922-478 (Phone)

HOME PAGE: http://www.szabist.edu.pk

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