Monetary Management in an Islamic Economy

Abstract

In an Islamic economic system financial and monetary relations have to be organized and conducted in a manner which precludes the use of interest in any form. Profit and profit sharing being permitted, a wide range of contracts are available to entrepreneurs and financiers. There are other permitted transactions to cover situations where profit sharing is not applicable. Currently we have two models of Islamic banking, the two-tier Mudarabah model which endorses fractional reserve banking and the other which opts for 100% reserves against demand deposits. No reserves are required against investment deposits. It is desirable to develop instruments that can provide the investors with sufficient degree of liquidity, security, and profitability. In a Stock market operating in accordance with Islamic rules disposition of investable funds would be made on the basis of profit prospects of the enterprises. Monetary policy and central banking will seek to evolve financial institutions and instruments that facilitate efficient mobilization of savings and allocation of resources consistent with the objectives of Islamic economy. All conventional tools normally available in a modern economy will be at the disposal of Islamic monetary authorities with the exception of those involving the use of interest.