What Monetary Authorities (Central Banks) Should for Islamic Banks

Abstract

Central banks are the institutions that have the power to create money and manage monetary policies. They are usually public monetary institutions or have public structures, but they conduct their policies following their law, based on a specifıc goal. Central banks can be dependent or independent of political authority. In many countries today, they are independent in the sense that their main objectives are determined together with the political authority, while the Central banks themselves decide which monetary policy tools and how\when to use them to achieve these objectives. In other words, the Central bank uses monetary policy tools independently from any political authority to reach its goals. In today's Central banking implementations, the primary objective of the Central bank is defıned as to achieve and maintain price stability. In this context, the Central banks determine the inflation rate target with the government. Based on that inflation target, they implement required monetary policies independently without being affected by the government. In today's Central banking practice, it is generally accepted that the independence of Central banks is instrument independence, especially in an environment where the purpose of the Central bank is determined by law. That means they should be free to choose the monetary policy tools to be applied to achieve this price stability goal.