IRP 13 – Tools For Controlling Monetary Variables in the Islamic Banking System

The prohibition from receiving and paying interest in Islamic banking system raises the question on how the monetary policy would be conducted in the absence of interest, both as a tool of monetary policy and also the choice of monetary variables to be controlled. In addition, the Islamic banking system is designed on the principle of profit sharing or non-profit sharing. In the first model, there is purely profit sharing principle on both assets and liabilities. In the second model, there is mixed of profit sharing and non-profit sharing principles. The difference lies in the sharing of profit from both models. Consequently, both models have implications for formulating the design and use of tools of monetary policy.