Abstract
Purpose: Although the treasury bill is the essential monetary instrument in central banking operations, its application in Islamic banking is not legitimate because it involves usury. This implies that the system cannot apply monetary and fiscal policies. To remove this obstacle “Interest-Free Treasury Bond” (IFTB) is introduced as a substitute for conventional treasury bills.
 Design: IFTB is a valuable paper which is issued by government treasury through a barter contract and is sold to central or commercial banks. The issuer is a debtor to the holder, and has to pay back the nominal value at maturity to the holder; in addition, the issuer is committed to lending a similar amount of money to the paper holder for an equal period. The Shariah and legal background of IFTB is explained through new contract types of “time-barter contract” and “time-loan contract”.
 Finding: IFTB is a zero-coupon, asset-backed note with no interest and is designed upon “debt equal to future loan”, or “loan equal to future debt” with “time-withdrawal right”. The paper holder can supply and transact her bond in the secondary market at a competitive price.
 Practical Implication: It can be used as a substitute for conventional treasury bills. All traditional and non-usury systems can implement IFTB.
 JEL: E43, E44, E52, E58, E62, E63
Highlights
Despite the needs of various debt-based papers, the transaction of these papers is not supported enough in traditional jurisprudence (Fiqh) and thereof, these instruments are less often used in Islamic finance[1]
That is why Interest-Free Bonds in general and Interest-Free Treasury Bond” (IFTB), in particular, do not enter into the domain of “usury transaction”; because its financial activity is not based upon transaction of the extra amount and just equal amounts are bartered along two time periods and creditor obtains no surplus
Whenever interest rate is high, the transacting price of IFTBs will decrease in the first period and will increase banks' incentives to deposit their funds with the government by buying IFTBs to obtain resources in the second period
Summary
Despite the needs of various debt-based papers, the transaction of these papers is not supported enough in traditional jurisprudence (Fiqh) and thereof, these instruments are less often used in Islamic finance[1]. Commercial, specialized and development banks and money and credit institutions and financial funds which have prudential and legal reserves at the central bank, can purchase these bonds and will become rightful to obtain interest-free loans equal to their purchase of these notes at maturity and pay back the loan to the issuer at the end.
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