Role and Functions of Central Banks in Islamic Finance
By Salman Ahmed Shaikh
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 Islamic finance and the practices followed by central banks in some of the Muslim countries where Islamic banking has been established. Refinance ratio and Qard-e-Hasan ratio and Mudarabah between central bank and Government/Multilateral FIs is in line with Islamic principles. Mudarabah can be used in Public Finance with profit sharing ratio benchmarked with the whole economy i.e. Nominal GDP growth rate. Equivalency of means test shows Nominal Interest rates and Nominal GDP growth rate are not significantly different from each other. Therefore, it is plausible to use growth in Nominal GDP as the benchmark for making and refining instruments for money market and provide a base instrument for the conduct of OMO in an interest free economy. The Nominal GDP linked benchmark can be used to benchmark domestic debt as well as foreign debt. Loans from IMF, WB and IDA and from rest of the world can be benchmarked using nominal GDP growth rate of the lender’s country of origin or benchmarked with weighted Nominal GDP growth rate in major donor countries to enable foreign debt management by central banks.
Contents
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