Central Banking in an Interest-Free Banking System

Abstract

Abstract. There is a vast literature on regulatory, monetary and institutional aspects of traditional banking system. This is not true for the interest-free Islamic banking framework. In this paper, the functions and tools of central banking in an Islamic framework are evaluated, and suggestions for adapting and revising the currently used tools of central banking for the Islamic central banking are made. It is shown that the current monetary policy tools of interest-based economies could be modified and used in an interest-free Islamic banking system. This paper shows that the needed technical and administrative modifications are to a large extent, minor. The existence of high speed computer technology and new accounting practices, it is argued, have increased the feasibility of a true interest-free Islamic banking.

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