Qard-al-Hasan-based monetary policy and the role of the central bank as the lender of last resort

Abstract

Purpose This paper aims to examine how a central bank (CB) can act as a lender of last resort (LOLR) for both Islamic and conventional interest-based banks by pursuing a Qard-al-Hasan (QH)-based monetary policy (MP). Design/methodology/approach The role of the CB as LOLR under QH-based MP and its effects on major macroeconomic variables, including deposits, loan creation and aggregate expenditures, are examined on theoretical grounds by using the aggregate output and aggregate expenditure model under the framework of Islamic MP. Findings When the CB acts as LOLR by pursuing QH-based MP, it automatically empowers Islamic banks (IBs) by providing access to borrowing funds from the CB on a QH basis. As a result, IBs will not be required to hold billions of dollars as liquid assets against liquidity risks. Thus, the lending capacity of IBs will increase and deposit expansion, loan creation and aggregate expenditures in the economy will all expand. This will in turn increase real GDP and employment while reducing the unemployment rate. Originality/value This is the first paper to analyze CBs acting as LOLR for both IBs and conventional interest-based banks by pursuing a QH-based MP, thus providing equal opportunities and equal access to borrowing facilities from the CB, along with equal partnership and fair competition for all and absolutely no discrimination to anyone. The LOLR service to all banks under QH-based MP will unveil a new horizon of opportunities where all financial institutions are expected to thrive. IBs will escape the constraints of the constant fear of liquidity risks and find a level-playing field.

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

“…Therefore, Istisna'a-Qard Hasan based monetary policy will be most effective and the cost of the manufactured products will be lower, and the quality of the products will be better, and more and more Producers, Manufacturers and Builders will be able to participate in the bidding process which may prevent anchoring bias and escalation commitment in decision making to only a few Suppliers or Builders (Selim, 2020b). Selim and Hassan (2020) have examined how a central bank (CB) can act as lender of last resort (LOLR) for both Islamic (IB) and conventional interestbased banks by pursuing a Qard Hasan (QH)-based monetary policy (MP). When the CB acts as LOLR by pursuing QH-based MP, it automatically empowers IBs by providing access to borrowing funds from the CB on QH basis.…”

“…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 effects of eliminating Riba in foreign currency transactions by introducing global FinTech network

“…Selim (2013) shows that interest cost can be eliminated in trade deficit financing by introducing innovative payment system where fully convertible domestic currency at par can be used for making spot and direct payments for imported goods and services. Selim and Hassan (2020) also portray that Qard Hasan -based interest-free monetary policy can effectively solve the problems of lender of last resort service of the CBs and the IBs can have full access to this emergency and much-needed services and thus IBs may not be required to hold billions of dinars as cash reserves against default risk. Such an enormous amount of idle funds can be invested into the economy and equilibrium real GDP, employment and prosperity will increase further through the multiplier–accelerator process and both unemployment rate and poverty will gradually disappear.…”

An Artificial Intelligence-based Islamic Fintech Model on Qardh-al-Hasan for Covid 19 Affected SMEs

“…Qardh-Al-Hasan is one such tool in Islamic finance which has the potential to empower the needy SME sector and help them in this pandemic (Selim & Hassan, 2020). Islamic finance is not just a financial system, rather it works on the religious beliefs of honesty, integrity and ethics.…”

“…On one of the occasions, Allah says that (Surah Al-Baqarah, verse No. 245) Qardh-Al-Hasan is a beautiful tool in Islamic finance that can be included in monetary policy to eradicate poverty and help the poor (Mishkin, 2009;Selim & Hassan, 2020).…”