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Role of Central Bank in Islamic Finance

Author

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  • Shaikh, Salman

Abstract

The rapid growth in Islamic finance industry urges us to not only look for alternatives in the Islamic commercial banking, but also focus on the regulator and its role and functions to enable it to work in conformity with Islamic principles. This study reviews limited, but precious academic literature on central banking and monetary management in an environment where Islamic finance is in vogue. Refinance ratio and Qard-e-Hasan ratio and Mudarabah between central bank and Islamic commercial banks are in line with Islamic principles and helps meet liquidity requirements in the banking sector. Mudarabah can be done with profit sharing ratio benchmarked on economy’s nominal income growth. We have presented the evidence on statistical equivalence of nominal Interest rates (being used in conventional banking) and Nominal GDP growth rate (we are recommending to use). The nominal GDP growth linked rate of remuneration can be used to benchmark for external loan arrangements including those from IMF, WB and IDA etc. We suggest central banks particularly in Muslim countries to use nominal income targeting as a rule for the conduct of monetary policy.

Suggested Citation

  • Shaikh, Salman, 2009. "Role of Central Bank in Islamic Finance," MPRA Paper 26702, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:26702
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. 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.

    More about this item

    Keywords

    Islamic Finance; Islamic Banking; Central Bank; Nominal Income Targetting; Inflation Targetting.;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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