Effectiveness of Sukuk as a Tool of Monetary Policy

Abstract

In interest based Capitalist system, monetary policy (MP) has become mostly ineffective in increasing output, and employment in recent years. Recession in the form of low or even negative growth rates of real GDP and high unemployment rates have set in and there are no signs of robust recovery in many of the capitalist economies. Today, conventional expansionary monetary policy appears to be creating more adverse effects than increasing real output and cutting unemployment rates. This paper attempts to explain such ineffectiveness of interest based conventional MP and provides alternative tools of monetary policy based on Sukuk mode of Sharia-compliant financing. In addition, it compares the relative effectiveness of the tools of monetary policy in both systems under fixed and flexible exchange rate regimes and finds that Sukuk based MP is relatively more effective in increasing output, employment, and maintaining low inflation rates without creating any negative side effects in the economy.

Interest-free monetary policy and its impact on inflation and unemployment rates

“…Selim (2013) argues that MP based on mu Á d arabah is more effective than IBMP. Selim (2015) further demonstrates that MP based on Á sukūk works better when Á sukūk are bought and sold in the open market by the CB. Islamic MP involving buying and selling of securities was initially emphasised by Chapra (1982) and Siddiqi (1982).…”

The effectiveness of Qard-al-Hasan (interest free loan) as a tool of monetary policy

“…Selim (2015) has also demonstrated that Sukuk can be used as effective tools of MP. Furthermore, Selim (2015) showed that MP based on buying and selling Sukuk in open market operations is relatively more effective than conventional interest based MP. Therefore, QH-based MP can be applied along with other Sharia-compliant modes of financing including profit-based models.…”

Towards the Implementation of Monetary Management in Islamic Economic System Based on Recent Developments

“…Interest based monetary policy which had been pursued in most of the countries of the world, including in the muslim majority countries had created the problems of under investment spending, unemployment, depressed economic growth rates, perpetual poverty, and periodic financial crisis. In current times, we have plenty of Islamic economic theories, and these theories and principles can easily be implemented for pursuing successful Islamic monetary policy (Selim 2015(Selim , 2019(Selim , 2020, especially for providing access to the lender of last resort services for the Islamic Banks (Selim & Hassan, 2020); for easily financing homes with Ijarah based diminishing Musharaka (Selim 2020a); for eliminating interest in trade or Riba al Fadl in foreign currency transactions (Selim 2021); for pursuing Sukuk based open market operation as part of Islamic Monetary policy (Selim 2015) instead of Treasury Bills and other interest based financial papers and securities; for pursuing interest free financing of infrastructure projects and redesigning it with Qard Hasan so that it will be acceptable to all Islamic Schools of Fiqh (Selim 2020); for providing Islamic business based Takaful insurance where the policy holders are both owners and risk takers and there are no middlemen who often deprive the share and benefits of the policy holders; here Policy holders are active participants and driving forces of such Islamic Business based Takaful Insurance and receive hundreds of thousands of Dinars (Here Dinar refers to Bahraini Dinar where 1 Bahraini Dinar=US$2.65) during their old age when they need it the most, (Selim 2015a); for providing Islamic value based Islamic Cooperative model for poverty elimination (Selim & Farooq, 2020); for permanently eliminating interest costs in trade deficits financing (Selim 2013) but in reality these wonderful Islamic economic theories have not been implemented correctly. This paper is a humble effort to urge nations of the world, especially the members of the Organization of Islamic Cooperation (OIC) countries to truly implement these theories and thus solving all the above problems of poverty, huge interest payments as part of trade deficit financing, unemployment, low income, widespread interest including Riba al Fadl or interest originating in trade, ineffectiveness in monetary policy and so on.…”

“…The motivation of this study is to highlight the importance of all the above theories and many other Islamic economic theories and to create an urgency to adopt such Islamic economic theories for achieving full employment, potential real GDP, eliminating poverty, Riba or interest and many other economic and social problems. Despite the development of full fledged and effective Islamic monetary policy as mentioned above (Selim 2015(Selim , 2019(Selim , 2020, the members of the OIC countries have so far paid little importance but many members of the Organization for Economic Cooperation and Development (OECD) countries are now currently pursuing interest free monetary policy in the form of zero central bank interest rate or even negative central bank interest rate. Such interest free monetary policy yields relatively better economic performance and thus more effective in controlling inflation rates and lowering unemployment rates.…”

“…Why some of the developed capitalist countries are pursuing zero or negative interest based monetary policy while others are not doing so? This study attempts to answer the above issues and to create awareness about the effectiveness of Islamic monetary policy which has already been developed in recent years (Selim 2015(Selim , 2019(Selim , 2020. Now all the nations should come forward and adopt such interest free monetary policy similar to some of the OECD countries who have been successfully pursuing interest free monetary policy and have had great success in maintaining better economic performance by keeping both unemployment and inflation rates low in recent years.…”