Islamic Central Banks: Comparison of Monetary Policies and Instruments

This assignment examines the operational differences between Islamic and conventional central banks, highlighting the significance of Sharia law in shaping monetary policies. It explores the use of interest-free monetary instruments, such as profit and loss sharing (Mudarabah and Musharakah), financial certificates (Sukuk), and mark-up contracts (Murabahah and Ijarah), to achieve economic stability and justice. The discussion further covers the payment and settlement policies within Islamic financial markets, including the RTGS system, and other electronic payment methods. Additionally, it analyzes the monetary policy instruments employed by Islamic central banks to manage inflation, control currency, and regulate money markets, with references to relevant academic literature.

UNIT:
NAME:
DATE:

Discussion
Islamic central banks are different from other central banks as conducting monetary polices is
restricted to interest free monetary instruments. The Islamic central bank and the banking sector
operate in compliance with Sharia laws (Islamic laws). The Islamic laws prohibits usury and
investment on businesses considered contrary to the Islamic teachings (Hanif, 2014). The
objectives of Islamic monetary policies are to stabilize the value of money, distribute justice, and
enhance economic well being.
The Islamic financial instruments include; profit and loss sharing (mudarabah and Musharakah),
financial certificates (sukuk) and mark up contracts (Murabahah and Ijarah) (Hanif, 2014). The
profit and loss sharing contract involve sharing of ownership agreement between parties. The
Mark Up contracts enables individuals’ access credit and short to medium term financing. The
other financial instrument is sukuk that is a certificate representing equal value of all assets that
an individual owns.
The payment and settlement policies in Islamic financial markets are; the RTGS system used to
settle customers and interbank payment in real time, BCTS used to clear cheques that are based
on electronic information and images, BENEFIT used to provide retail payment and EFTS which
enable instant low value payment for bank customers (Daly, and Frikha, 2017).
The Islamic central banks use Treasury bill, balance of payment surplus and bank deposit interest
rates monetary policies to control inflation and manage currency and demand in the economy
(Abedifar et al., 2014). The monetary policies regulate the money markets and ensure stability of
value of money and economic well being in the economy. The monetary policy instruments used
include; statutory reserve requirement, target growth in money supply, credit ceiling etc.

References
Abedifar, P., Ebrahim, S.M., Molyneux, P. and Tarazi, A., 2015. Islamic banking and finance:
recent empirical literature and directions for future research. Journal of Economic Surveys,
29(4), pp.637-670.
Daly, S. and Frikha, M., 2017. Determinants of bank Performance: Comparative Study Between
Conventional and Islamic Banking in Bahrain. Journal of the Knowledge Economy, 8(2), pp.471-
488.
Hanif, M., 2014. Differences and similarities in Islamic and conventional banking.