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Continuous growth in Islamic finance calls for an in-depth study of the framework in which the
monetary policy maker (i.e., the central bank) performs its functions. Central banks in Muslim
countries are using various instruments for monetary policy purpose including interest rate. As a
result, Islamic Financial Institutions (IFIs) are facing issues in benchmarking the price of financial
instruments. Acceptable solution to benchmarking lies in the presence of a real economic activity
in the base of any proposal and its feasibility for business performance when put against
conventional banking. This paper presents empirical evidence of statistical equivalence of
nominal GDP growth rate and official interest rate for ‘advanced,’ ‘all,’ and some Muslim
countries. We propose nominal GDP growth rate as benchmark for pricing domestic financial
transactions of IFIs as well as for pricing external bilateral/multilateral loans. The paper also
suggests nominal income targeting as monetary policy regime and provides a liquidity
management mechanism for banking system in Islamic financial environment.
Muhammad Nadim Hanif, Salman Ahmed Shaikh. (2010) Central Banking and Monetary Management in Islamic Financial Environment, Journal of Independent Studies and Research-Management, Social Sciences and Economics, Volume-08, Issue-2.
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