Question

When we use money and its role in the Islamic context, does not vary from other economic structures, we should find monetary policy as an essential instrument available to the government to achieve macroeconomic objectives.

Analyse the monetary policy operational framework for Islamic banks; and explain Islamic monetary instruments. (850 words)

Answer 1

In islamic finance money is considered as medium of exchange or unit of measurement only, hence interest is considered as haram i.e. unfair reward to the provider of capital.

Since interest is not allowed, depositors are rewarded by a share in the profit from the underlying business.

Islamic monetary instruments

As mentioned above islamic finance products are based on profit sharing, there are five main contracts in islamic finance which are mentioned below.

A. Mudarabah(profit and loss sharing)

In mudarabah contract the investor(called rabbul Mal) provides capital while entrepreneur (Mudarib) provides expertise and specialisation. Profits are shared according to the ratio decided at the outset of contract.

B. Musharakah(joint venture)

A form of partnership between bank and client whereby each party contributes to the capital of partnership to establish a new project or share in the existing project.

C.Ijara(leasing)

Ijara means transfer of property to another person in exchange of rent from that person. Lessor is called as Mu'jir and lessee is called as Musta'jir and rent payable is called as ujarah.

D. Sukuk(bonds)

Sukuk is sharia compliant bond. It offers a fixed rate of profit which is generated from the rentals of the underlying assets. Though sukuks comes in variety of forms, Al-Ijara being one of the most common structure. Under this structure ownership of asset is transfered to bondholder and asset is leased back to issuer. At the maturity ownership will be transfered back to issuer.

E. Murabaha (cost plus)

For a sales contract where the buyer and seller agree on the mark-up(profit) or cost-plus price for the item(s) being sold. Murabaha is islamic form of sales contract.