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Qard-al-Hasan-based monetary policy and the role of the central bank as the lender of last resort

Qard-al-Hasan-based monetary policy and the role of the central bank as the lender of last resort This paper aims to examine how a central bank (CB) can act as a lender of last resort (LOLR) for both Islamic and conventional interest-based banks by pursuing a Qard-al-Hasan (QH)-based monetary policy (MP).Design/methodology/approachThe role of the CB as LOLR under QH-based MP and its effects on major macroeconomic variables, including deposits, loan creation and aggregate expenditures, are examined on theoretical grounds by using the aggregate output and aggregate expenditure model under the framework of Islamic MP.FindingsWhen the CB acts as LOLR by pursuing QH-based MP, it automatically empowers Islamic banks (IBs) by providing access to borrowing funds from the CB on a QH basis. As a result, IBs will not be required to hold billions of dollars as liquid assets against liquidity risks. Thus, the lending capacity of IBs will increase and deposit expansion, loan creation and aggregate expenditures in the economy will all expand. This will in turn increase real GDP and employment while reducing the unemployment rate.Originality/valueThis is the first paper to analyze CBs acting as LOLR for both IBs and conventional interest-based banks by pursuing a QH-based MP, thus providing equal opportunities and equal access to borrowing facilities from the CB, along with equal partnership and fair competition for all and absolutely no discrimination to anyone. The LOLR service to all banks under QH-based MP will unveil a new horizon of opportunities where all financial institutions are expected to thrive. IBs will escape the constraints of the constant fear of liquidity risks and find a level-playing field. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Islamic Accounting and Business Research Emerald Publishing

Qard-al-Hasan-based monetary policy and the role of the central bank as the lender of last resort

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References (40)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1759-0817
DOI
10.1108/jiabr-12-2017-0190
Publisher site
See Article on Publisher Site

Abstract

This paper aims to examine how a central bank (CB) can act as a lender of last resort (LOLR) for both Islamic and conventional interest-based banks by pursuing a Qard-al-Hasan (QH)-based monetary policy (MP).Design/methodology/approachThe role of the CB as LOLR under QH-based MP and its effects on major macroeconomic variables, including deposits, loan creation and aggregate expenditures, are examined on theoretical grounds by using the aggregate output and aggregate expenditure model under the framework of Islamic MP.FindingsWhen the CB acts as LOLR by pursuing QH-based MP, it automatically empowers Islamic banks (IBs) by providing access to borrowing funds from the CB on a QH basis. As a result, IBs will not be required to hold billions of dollars as liquid assets against liquidity risks. Thus, the lending capacity of IBs will increase and deposit expansion, loan creation and aggregate expenditures in the economy will all expand. This will in turn increase real GDP and employment while reducing the unemployment rate.Originality/valueThis is the first paper to analyze CBs acting as LOLR for both IBs and conventional interest-based banks by pursuing a QH-based MP, thus providing equal opportunities and equal access to borrowing facilities from the CB, along with equal partnership and fair competition for all and absolutely no discrimination to anyone. The LOLR service to all banks under QH-based MP will unveil a new horizon of opportunities where all financial institutions are expected to thrive. IBs will escape the constraints of the constant fear of liquidity risks and find a level-playing field.

Journal

Journal of Islamic Accounting and Business Research – Emerald Publishing

Published: Jan 20, 2020

Keywords: Lender of last resort; Qard al-Hasan-based monetary policy; Liquidity risk management; Liquid asset holdings; Central bank; E52; E58; P51; Z12

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