ABSTRACT
The paper examines the issue of monetary policy from an Islamic perspective and offers a transitional solution given the existing circumstances in the contemporary Muslim economies, dominated by financial institutions, fiat currencies, and fractional reserve banking. Qualitative research with a “complex systems” perspective is used to determine the state of monetary policy in several Muslim majority countries, to study the issues and challenges, as well as to point out the most problematic areas that need urgent addressing. The paper will argue that central banks are the main institutions that have the power and responsibility to maintain the country’s economic stability and the value of a local currency, as well as to affect the inflation and unemployment rates. It will be argued that in the current circumstances central banks can act within the given system to (1) encourage financing of small and medium enterprises; (2) initiate the growth of small local financial institutions, such as cooperative and savings banks; and (3) allow “monetary democracy.” The paper is therefore divided into three main parts. After the introduction, the first section will provide a historic overview of ideas on monetary policy by several influential Muslim economists over the last forty years and will offer a critique of their views. The second section will deal with the issues of money and banking from a “complex systems” perspective and demonstrate common misconceptions that lead to improper understanding amongst the general public and the academic community. And before concluding, the paper will offer intermediate solutions within the current financial system. This section will argue that central banks can use the power of the banking system to create money to finance SMEs while curbing speculation and limiting the purchase of financial assets.