Feasibility of Implementing Negotiable Certificates of Deposit as a Tool to Investigate the Open Market Operations on Interest-free Banking System

Considering the prohibition of riba (Usury), and consequently the impossibility of using interest based bonds, they can not utilized as policy tool in the Usury-Free Banking System. As a result the Open Market Operations as specified by buying and selling interest-based bonds is not applicable in this system. Thereby virtually the oldest and best-known, and yet the most important tool of monetary policy for controling liquidity in the economy is excluded from the set of policy tools of the central bank.. Instead there are certain replacement securities such as “Participatory Bonds”, “Istisna securities” etc. devised by Moslem economists to be utilized as a substitute for the Open Market Operations in a non-usury banking system. The current paper using a descriptive methodology attempts to analyz the hypothesis that: “utilization of “Negotiable Certificates of Deposit”, as a compliment for bonds, Sukuk and other securities Provides Central Bank with alternative basis for policy tools in liquidity control and monetary management, within the framework of the Usury-Free Banking System, and therefore to some extent compensate for the absence of traditional bonds in monetary policy tools." Finally it is concluded that “Negotiable Certificates of Deposit” as a means of supplementing other securities, can be used in open market operations in a non-usury banking, enabling central bank to buy and sell securities through open market operations in the secondary market, This can effectively enable the monetary authority to manage the liquidity and enforce the monetary policy.