Tag: MonetaryPolicy

Money and Inflation

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We often hear the term ‘inflation’ to describe a general increase in prices, this rise is typically caused by one of two factors. First, it can occur due to a change in the purchasing power of what the money symbolizes, often triggered by a deliberate reduction in the quantity of wealth it represents. This is the essence of monetary manipulation. Second, prices may rise due to a fall in purchasing power without any change in the quantity of the money itself. For instance, if gold becomes naturally cheaper because of a new supply, an Islamic Dinar made of 4.25 grams of gold will naturally buy less.

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Pricing Benchmark, Money Market Instruments and Monetary Policy

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Islamic banks currently use the same interbank offered rate in pricing their products. By and large, they provide debt based financing rather than equity based modes of financing. Thus, the promise of egalitarian distribution and inclusivity remains unrealized in practice at the moment. From a more pragmatic view to achieve the promise of Islamic economics, it is important to transform the way Islamic banking and finance is conducted in the contemporary monetary system. One way to achieve that is to link the payoffs to the saving deficient and saving surplus units through real sector economic payoffs. This article gives a review of literature on this issue and the next section presents an alternate proposal to achieve the aim of having a distinct system of financial intermediation which is less reliant on debt based financing and which is closely aligned with the real sector of the economy.

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Stabilizing Purchasing Power of Common Medium of Exchange 

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The rate of return for most non-agricultural activities will fall to naught, while the rate of return for farming will soar high. The organized sector, assisted by interest-driven financing, keeps prices of its products and services high by controlling production and employment. Due to the confusion created by the illusion of consistently rising prices, commoners fail to respond effectively.

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Monetary Policy and Islamic Banks: A Critical Literature Review

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The authors conclude that more research is needed to fully understand the relationship between monetary policy and Islamic banking. They emphasize the importance of considering factors like the structure of Islamic banks’ balance sheets and the influence of profit-and-loss sharing in deposits and financing. The authors note that the existing research has a lack of theoretical grounding. Most studies focus on whether monetary policy influences Islamic banks, but they do not investigate why this happens. The authors suggest that the theory of Islamic finance could offer explanations.

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