Istisna’abased monetary policy and its effectiveness in achieving full employment and price stability

Abstract

Purpose This paper aims to explore Istisna’a as a tool of monetary policy (MP) and examines its effectiveness in achieving full employment income and price stability. Design/methodology/approach This paper uses Istisna’a as a tool of MP and examines its effects on key macroeconomic variables on purely theoretical ground. The effectiveness and the impact of Istisna’a-based MP is examined by using aggregate output and aggregate expenditure model, embedded with Islamic economic principles, including zakat function. Findings Istisna’a-based MP immediately creates well paid jobs, positively contributes and expands the size of the manufacturing sector, increases capital per person employed, labor productivity and thus increases output, employment and promotes industrialization. Increase in the size of manufacturing sector will not only increase manufactured value-added exports but also cut high valued manufactured imports and thus increases positive trade balance and eventually reduces trade deficits. Increase in labor productivity will improve the standard of living, and eventually the economy will yield sustainable high growth rates, full employment and prosperity. Originality/value This is probably one of the first attempt to systematically develop the Istisna’a-based MP with detailed MP transmission mechanism. This new contribution in the field of Islamic MP will unveil the horizon of sustainable economic growth, creation of well paid jobs, expansion of manufacturing sector, rapid industrialization and the increase in capital per person employed across the economy, and eventually Istisna’a-based MP will be one of the most effective tool of MP for transforming an economy into a relatively higher and sophisticated stages which will eventually promote sustainable development.

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

“…These institutions became a central hub inviting to meet financial obligations, and to design structure of products in compliance with Islamic law of financial contracts. Parallel to these innovative steps, Iqbal (1997), Naqvi (1981), Al-Jarhi (1983), Ahmad (1984), Chapra (1985Chapra ( , 1996, Kuran (1986), Ariff (1988), and Selim (2015Selim ( , 2019Selim ( , 2020 provided basis to Islamic monetary management in modern context. Currently, Islamic banking industry is an emerging market with a growing share over the globe, especially, with concentration in Islamic regions.…”

“…Thus, Islamic banks can effectively compete the conventional commercial banks and will continue to grow and prosper without limits and constraints. Selim (2020) proposed Istisna'a-Qard Hasan based monetary policy because Istisna'a or order to manufacture mode of financing is only supported by Hanafi School of Fiqh. Other Schools of Fiqh do not support it because in Istisna'a, both price and product are delayed and delivered later and the Builder or Manufacturer or the Producer must find funds for producing the product(s) and they may need to borrow funds on Riba.…”

“…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.…”