A Comparative Study of the Role and Functions of Conventional and Islamic Central Bank

Abstract

The central bank stands at the top of the banking hierarchy in every country and is empowered to perform important functions such as issuing and regulating currency notes, monitoring banks operations and their credit policies. In most countries, it is also authorized to formulate and implement monetary policy according to the guidelines provided by the government. Central banks are among the most important players in financial markets throughout the world. There are many factors that affect the economic stability at national and international level. Apart from the modern banking system and their crucial role in the economy, the invention of derivatives, future and forward sales, future markets capital markets and money markets have brought evolution in financial world. Moreover, there is conflict between the role, functions and objectives of these newly introduced instruments and markets. Many of these factors affect the supply of money. Therefore, there must be an institution that regulate them and minimize the negative effects of such economic activities in money and capital markets. Islamic central bank wills apparently play almost the same role as a conventional central bank. However, the main factor that makes difference between the two is interest which is prohibited in Islam hence, cannot be practiced by an Islamic central bank. Most of the monetary and other tools used by the central banks to perform its duties and carry out its functions include Riba. Thus, an Islamic central in a modern economic system has to achieve the same objectives and perform same duties as a conventional bank performs. However, it has to use tools other than those generally used by a conventional central bank. This article proceeds with understanding the concept of Islamic central bank. The second part  discusses the functions and role of an Islamic central bank to determine that how it is different from a conventional central bank. The last part consists of some important findings of the research

Key words: Central bank, Islamic Central bank, conventional bank, comparative study