Question

1.Elaborate the tools of Monetary Policy under Islamic Economy?

2. Make a detailed comparison between conventional and Islamic Banking?

Answer 1

1) Tools of Monetary policy under Islamic Economy :

Islamic economy takes into account majorly the following tools of Monetary policy :-

• STABLE VALUE OF MONEY : In Islamic economy, the central bank makes sure to preserve the value of money. To do so, the central bank grows it's money supply in real terms but growth of money supply is done in limits so that situations like inflation does not occur in it's economy. Islamic monetary policy believes in relative stability of general price level and not in absoulte stability as absoulte stability doesn't bring full scale employment and growth in an economy.
• GROWTH OF ECONOMY AND EMPLOYMENT : Even if it comes to monetary policy, Islamic Economy gives special importance to their morals and Islamic values. According to Islamic Economy, along with inflation, even unemployment and recession are not acceptable as it cause human suffering. But to gain economic prosperity no illegal or by any such means goes against the Islamic value is allowed. Also, they keep in mind that the production shall not harm the present or the future generations in any form. Thus their whole emphasis is on "sustainable development". They give importance to Environment, surroundings and make emphasis on preserving it for present and future generation.
• DISTRIBUTIVE RESOURCES AND JUSTICE : The monetary policy of Islamic Economy doesn't believe in concentration of wealth or money or even political power. But itsi monetary policy also takes care that the policy shouldn't be too stringent that it starts to affect efficiency and effectiveness of the economy as a whole.

2) Comparison between conventional and Islamic banking :

There's a difference between conventional banking and Islamic banking. One key point is, in Conventional banking banks earn money by charging interests and fees. Whereas in Islamic banking (Shaira principles) charging interest is prohibited. Islamic banks earn money by "profit and loss" sharing or leasing or trading etc.

Conventional banking exchanges and trades money to earn profits. Whereas in Islamic banking, money are used only as an exchange but not for trading purposes. Islamic banking follows Islamic rules wherein they store the value of money and don't treat the money as a trading commodity.

Conventional banking involves risk factor as they charge you Interest and also principal amount on interest being charged. So if you took a loan for your business and due to unfortunate reasons it fails after sometime then your money will be lost. Whereas in Islamic baking (Mutanaqisah principle) there's no interest. If in the above same example your business suffer loss or fails then some amount will be borne by the bank also.

Conventional banking allows to trade in products and even services in order to earn profits. Whereas in Islamic banking trading of any product is not allowed. Products like Alcohol or any other intoxicant is prohibited. Islamic banking is against gambling or any such activities which sets wrong moral examples to the society.