It is usually expected that by changing the interest rate and other relevant monetary variables, the central bank is able to influence the overall magnitude of credit creation in the economy. These techniques of credit control may have to un-
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It is usually expected that by changing the interest rate and other relevant
monetary variables, the central bank is able to influence the overall magnitude of
credit creation in the economy. These techniques of credit control may have to un-
dergo certain changes and modifications if the commercial banks start operating
on a non-interest basis.
The regulation and control of Islamic banks by the central banks raises a
number of serious issues. The financial operations of Islamic banks will have to be
reviewed carefully in order to ascertain which of these operations create credit and
need to be controlled and regulated. It is well known by now that Islamic banks per -
form a number of functions and undertake a number of financial operations ".
Hence, only those operations which add to the money supply of the economy need
to be controlled. Furthermore, what should be the battery of tools which may be
used for controlling Islamic banks? Obviously, those techniques which involve in-
terest in any respect, shall be out of question, as their use would be in conflict with
the very nature of Islamic banks. Hence, some innovations in the techniques of cre-
dit control have to take place.
It may be held that present scene of Islamic banking consists of mainly two
types of banking institutions:
Islamic banking institutions operating mainly in the financial markets
which are dominated by the interest based banking institutions and trans-
actions. These are the Islamic banks operating in the Middle East and
The other category of Islamic banks belongs to those countries where ef-
forts are underway to reorganize the whole banking system along the Is-
lamic lines i.e. on an interest free basis.
In both categories, by now, sufficient experience has accumulated to warrant a
study on the regulation and control of Islamic banks by central banks. In the first
case, Islamic banks are subject to rules and regulations of central banks which
grant them permission to operate in the money market and reserve the right to con-
trol and supervise their activities. However, these banks are also bound by their
own statutes and Articles of Associations which require them to conduct their ac -
tivities in accordance with the requirements of Islamic Shari'ah. It is possible that
1. For details of functions of Islamic banks and financial operations undertaken by them, see Ausaf
Ahmad, Development and Problems of Islamic Banks, 1987, Islamic Research and Training Insti-
tute, Jeddah. Also see Ausaf Ahmad, Contemporary Practices of Islamic Financing Techniques
1989) Unpublished Research Paper, Islamic Research and Training Institute, Jeddah.