Financial Islamic Money Market: Nature, Functions and Instruments

Money market is one of the most important financial markets in conventional banking system that has different functions like price discovery of short term funds. Accepting or refusing this market in an Islamic framework, can have important effects on theory and practice of Islamic banking that cannot be ignored. Having reviewed the subject of money market in the conventional financial system, this paper tries to evaluate the possibility of creating an Islamic money market through short term financial instruments. The results which are based on an analytical-descriptive approach, show that: firstly, the Islamic money market is theoretically plausible. In fact, it is quite possible to make Islamic money market by making use of Islamic short-term instruments. In addition to theory, the Islamic money market is practiced in some Islamic countries like Malaysia and Iran. Secondly, in the Islamic Fiqh, different kinds of Islamic contracts with fixed and predetermined return rate are available (like Murabaha). It is possible to use these contracts in the Islamic money market. Finally, unlike the conventional money market where all the contracts are done based on buying and selling of bonds, all the Islamic money market contracts are based on Sukuk; which is related to the real sector of the economy. In addition, unlike the conventional money market, all the instruments and Sukuk used in the Islamic money market have different kinds of risk over and above the credit risk. These two are the most important differences of Islamic and conventional money market.