Shari’ah Analysis of Discount Rate as a Tool of The Conventional Monetary Policy

Abstract

Several Shari’ah issues in conventional monetary policy need to be reviewed from Shari’ah perspective. In fact, conventional monetary policy is based on the use of interest rate as a primary tool to achieve the monetary policy objectives. The main tools of monetary policy that are discount rate, open market operation and reserve ratio requirement also involve interest. There are also other factors and reasons that will make these conventional practices of monetary policy unlawful form Shari’ah point of view.  Therefore, conventional monetary policy assumes special importance from Islamic perspective because of strict prohibition of Riba.

The following discussion is related to Shari’ah analysis of one of these monetary policy tools. In this article Discount Rate Policy will be discussed to confirm its permissibility from Shariah point of view and the possibility of using this tool by an Islamic central bank will also be discussed.

This article starts with an introduction of the discount rate policy followed by the Shariha analysis of policy. The last part consists of conclusion and imported results of the discussion.