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

Abstract

Purpose This paper aims to investigate the macroeconomic effects of Qard-al-Hasan (QH) as a tool of monetary policy (MP) and its effectiveness in achieving full employment and price stability in the economy. Design/methodology/approach QH-based MP and its effects on major macroeconomic variables are examined on theoretical ground by using the standard aggregate output and aggregate expenditure model within the framework of Islamic economic principles. Findings QH-based MP positively influences real sectors of the economy and increases output, and the economy returns to full employment. QH provides the lowest possible borrowing costs across the economy and thus triggers rightward shift in aggregate supply curve and thus increases output and lowers price level. In addition, increase in output eliminates excess demand or shortages and thus maintains price stability. Furthermore, QH-based MP also increases exportable surplus and exports, decreases imports as well as increases inflow of funds and foreign currency reserves with the Central Bank and thus makes MP more effective. Research limitations/implications QH-based MP is usually expansionary MP, and as such, it can be argued that there is a probability that QH-based MP may lead to higher inflation rate. However, in this study, it has been shown with real world data in Table II, that 23 countries in Group 1 have pursued zero or negative interest rate policy and their experiences mitigate such probability. Originality/value This is, perhaps, the first paper that presents a complete model of QH as a tool of MP with fully explained transmission mechanism. This is new contribution in the literature of Islamic finance where theoretical model on QH is systematically developed and applied as an effective tool of MP in attaining full employment and price stability. This model of QH-based MP can unfold a new horizon of uninterrupted economic growth, full employment and price stability by increasing output and employment, as well as by eliminating excess demand or shortages.

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

“…The fourth view is proposed by Selim (2019) where Qard Hasan based monetary policy has been designed in the light of the verses of the Holy Qur'an and and the Hadith of Prophet Muhammad (PBUH) and it has been proved that such monetary policy is most effective in bringing full employment and controlling inflation. In this Qard Hasan based monetary policy, Selim (2019) also proposed the change in the direction of money supply and monetary transmission mechanism from the "Central bank to commercial banks" to "Central bank to the final users such as the poor and destutes and all those who deserve of additional increase in money supply or for whom money supply will be intended to" in the light of the verse 7 of Sura Hasr:…”

“…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.…”

Strategic Design of Agricultural Financing in Rural Area Based on Competitiveness of BMT

“…Terminologi qardhul hasan dapat Gambar 2 Matriks kondisi lingkungan BMT dalam pembiayaan pertanian di perdesaan Jawa Timur dipahami sebagai interest free-loans financing(Abdullah 2015;Selim 2018) atau pinjaman dalam jangka waktu tertentu dimana debitur hanya berkewajiban mengembalikan pokok pinjaman tanpa harus memberikan bea tambahan atas uang yang dipinjamnya. Penyaluran bantuan dengan skema qardhul hasan diberikan dalam jangka waktu tertentu sesuai analisis kelayakan.…”