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Central banking and monetary management in islamic financial environment

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  • Hanif, M. Nadim
  • Sheikh, Salman

Abstract

Continuous growth in Islamic finance calls for studying the framework in which the monetary policy maker (i.e., 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.

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File URL: http://mpra.ub.uni-muenchen.de/23548/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22907.

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Date of creation: Nov 2009
Date of revision: 25 May 2010
Handle: RePEc:pra:mprapa:22907

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Related research

Keywords: Islamic Finance; Central Bank; Interest Rate; Nominal Income Targeting;

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Cited by:
  1. Shaikh, Salman, 2012. "Interest Based Financial Intermediation: Analysis and Solutions," MPRA Paper 42500, University Library of Munich, Germany.

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