Absence of Interbank Loan Market and Banking Short-Term Liquidity Management Mechanisms: The Most Pressing Problems of the Islamic Finance Model
6 Pages Posted: 23 Feb 2015
Date Written: February 15, 2015
The Islamic finance model is sufficiently well specified at the “bank-to-client” level, but does not regulate the “central bank-to-bank” and “bank-to-bank” relationships. This paper proposes a concrete Shariah-compatible mechanism for setting up an Islamic interbank loan market and managing Islamic bank liquidity, which allows a segregation of Islamic and non-Islamic finance. Islamic banks should as a minimum delink from LIBOR and other traditional reference rates and come up with their own financial benchmarks.
Keywords: Islamic banks, central bank, liquidity, interbank lending market, money market
JEL Classification: E5, G1, F3
Suggested Citation: Suggested Citation