Monetary economics and monetary policy in Islamic perspective

Abstract

This chapter discusses an economic model under which a theory of monetary economics is discussed to understand how monetary economics can be understood in Islamic perspective. After this discussion, which can be considered as a prelude to the theory of economics from an Islamic perspective compared to classical and Keynesian theories of economics (and hence can be a part of any text book on theory of Islamic economics), this chapter comes to certain aspects of monetary issues from the Islamic perspective (i.e., money creation, banking and financial system, and monetary policy issues). These aspects are then discussed in this chapter only in reference to the contemporary Muslim universities that are in the process of introducing Islamic banking in their economies as a first step to make their entire economy Islamic. In this effort, Muslim economies are not realizing the need to change some important aspects in the monetary system and the polices required for it in order to make Islamic banking grow ahead of the conventional banking, showing the true aspect of the Islamic spirit in Islamic banking. The most important issue to be discussed is the issue of money creation, which is restraining Islamic banking to grow ahead of the conventional banking. The chapter thus aims at contributing towards making monetary economics and monetary policy not only in general from the Islamic perspective but in particular in the context of contemporary Muslim economies that are aiming to make their economies Islamic.