The use of Islamic finance practices as Central Bank monetary policy instruments

Islamic finance is a concept that become increasingly popular due to the accumulation of capital in Islamic countries. The whole world is in search of an economic alternative, as economies dominated by conventional economics are constantly engaged in crisis-inducing transactions. Islamic finance seen as an alternative to conventional economics for reasons such as not introducing interest directly into economic equations, adopting a full reserve system, not tolerating speculative attacks due to the avoidance of uncertain transactions. However, in many countries practicing Islamic finance, the market is managed by Central Banks established in accordance with the principles of conventional economics. In these markets, both participation banks and interest rate-sensitive investors cannot use the instruments determined by the Central Banks to achieve monetary policy objectives. The Central Banks generally pursue monetary policy with the aim of achieving price stability. The success of the determined policy depends on all actors in the market to act in accordance with this policy. In practice, since participation banks and interest-sensitive investors do not participate in the interest-bearing market. The main purpose of this thesis is to determine existing practices which used as monetary policy instruments by the Central Banks in order to achieve monetary policy objectives. In this context, firstly, objectives and instruments of monetary policy will be given in terms of conventional economics and then Islamic finance and after the principles on which the two economic systems are based and the differences between them are stated and finally the monetary policy instruments in selected OIC countries that can be used by the Central Bank for the success of Islamic finance practices will be given. Keywords: Islamic Financial System, Islamic Monetary Policy, Central Bank, Monetary Policy, Price Stability