Central bank Islamic monetary instruments: a theoretical approach

Abstract

Purpose

The purpose of this paper is to propose the Islamic monetary instruments as an Islamic approach for the central banking monetary operation. It is assumed that the central bank may not deal with the uncertain return of the project (asset) and its ultimate monetary policy target is to stabilize the economy by utilizing the excess (idle) liquidity in the economy. This theoretical study benefits the central bank from the assessment of the usage of every proposed Islamic monetary instrument with respected to the monetary operation purposes.

Design/methodology/approach

The paper exercises four feasible Islamic monetary instruments based on the characteristics of Sharia contract which suit the nature of the current central banking monetary operation. Every instrument is elaborated mathematically to analyze its monetary impact and the possible reaction of depositors. Finally, the paper suggests the deterministic factors to successfully offer such Islamic instruments.

Findings

The exercises find the unique operation of every Islamic monetary instrument. Based on the monetary impact of each instrument, the central bank can now have an alternative monetary policy based on the Sharia principles and operation.

Research limitations/implications

The paper has so far found the feasibility of four Islamic monetary instruments. There might be other Islamic monetary instruments which can be viable to be exercised.

Originality/value

To the best of the author's knowledge, this is the first paper trying to exercise the alternative of the Islamic instruments for monetary operation.

Citation

Ismal, R. (2011), "Central bank Islamic monetary instruments: a theoretical approach", Studies in Economics and Finance, Vol. 28 No. 1, pp. 51-67. https://doi.org/10.1108/10867371111110552