A Study of Conventional Monetary Policy Tools in Interest-free Banking System

Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity. Obviously, prudent implementation of monetary policy to realize monetary goals is possible only through their respective tools, not to mention the fact that it requires much scrutiny at the surface and the underlying levels. In conventional banking, they make use of qualitative and quantitative tools to implement monetary policy and achieve economic goals. Given the fact that usury (riba) is forbidden in Islam and it is not permissible to conduct interest-based transactions or any tools for that purpose, the present study aims to critically assess the foregoing tools as well as evaluate their application and functionality in an interest-free banking system as the variables of the economic policy for control and monitoring of liquidity and adjustment of the currency strength.