The role of Islamic secondary market securities in the expansion of open market operations

Open market operations are among the most important instruments in monetary policy due to their high flexibility, speed, desirable efficiency, rapid effect, the fact that their volumes are under the complete control of the central bank, their leading role in the development of financial markets, and the fact that they facilitate public sector debt management. There are some barriers to using these instruments in the Central Bank of the Islamic Republic of Iran after passing the interest-free banking law. First, it is not allowed to use interest rate-based bonds. Second, there is a lack of wide, deep, and efficient secondary market. Third, some securities are traded in the primary market, while they are impossible to be traded in the secondary market. None of the proposed instruments could replace open market operations, while all banking experts have emphasized their necessity in dealing with temporary crises, long- term planning, and policymaking. This paper exploited descriptive and content analysis techniques due to the importance of this instrument in implementing the monetary policies of the Central Bank and the lack of development in secondary markets. It investigated the hypothesis as to whether the development of securities secondary market is necessary for the Central Bank to succeed in open market operations. Results show that one of the ways to use open market operations in the country efficiently, extensively, and most importantly, according to religious criteria, is to attend to secondary market and its development in order that it performs efficiently from an economical point of view, other than not being based on interest rates and complying with Islamic law. Using secondary market is feasible in new financial instruments which are portable and for which the formation of secondary market is possible.