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.
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