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Central banking and monetary management in islamic financial environment

Author

Listed:
  • 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.

Suggested Citation

  • Hanif, M. Nadim & Sheikh, Salman, 2009. "Central banking and monetary management in islamic financial environment," MPRA Paper 22907, University Library of Munich, Germany, revised 25 May 2010.
    • Handle: RePEc:pra:mprapa:22907
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    References listed on IDEAS

    as
    1. Hamid Zangeneh & Ahmad Salam, 1993. "Central Banking in an Interest-Free Banking System المصارف المركزية في نظام مصرفي خال من الربا," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 5(1), pages 25-36, January.
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    Cited by:

    1. Arikha, Dahlia, 2018. "Monetary policy in perspective of Umer Chapra," MPRA Paper 87022, University Library of Munich, Germany, revised 04 Apr 2018.
    2. Uddin, Md Akther & Halim, Asyraf, 2015. "Islamic monetary policy: Is there an alternative of interest rate?," MPRA Paper 67697, University Library of Munich, Germany, revised 07 Jun 2015.
    3. Shaikh, Salman, 2012. "Interest Based Financial Intermediation: Analysis and Solutions," MPRA Paper 42500, University Library of Munich, Germany.
    4. Uddin, Md Akther, 2014. "Can GDP growth rate be used as a benchmark instrument for Islamic monetary policy?," MPRA Paper 67696, University Library of Munich, Germany.
    5. Uddin, Md Akther & Ali, Md Hakim & Radwan, Maha, 2019. "Can GDP Growth Linked Instrument Be Used For Islamic Monetary Policy?," MPRA Paper 102888, University Library of Munich, Germany.

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    More about this item

    Keywords

    Islamic Finance; Central Bank; Interest Rate; Nominal Income Targeting;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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