Towards integrated monetary policy under dual financial system: interest system vs. Profit-and-Loss sharing system

Abstract

In o country adopting duo/ financial/banking system (conventional and Islamic), monetary authority has the responsibility to maintain financial/monetary stability and synergy of both systems to optimize the benefit for social welfare. The synergy should maintain the essence and characteristics of both systems, and not dissolve one into the other, to achieve sustainable harmony that assure financial system stability, accelerate economic activity in real sector, and improve distributive prosperity. This study analyses and compares the two monetary systems using descriptive and deductive approaches, where only interest system vs. PLS system that differentiate the two monetary systems. The results of deductive approach ore similar to the results of descriptive approach, where both analyses show that PLS system outperforms interest based system. These results imply that PLS return is o more efficient monetary policy instrument compare to interest rate to maximize the output, distributive social welfare, and justice. Under dual financial system, this means that PLS return should be adopted as monetary policy rote. Interest rote in the conventional financial system should benchmark to this PLS return to minimize the gap or excess between demand for and supply of investments in conventional economy, to minimize the negative impact of any shock in the economy, so that it will produce investment level that con minimize the negative impacts of exploitation, predation, and intimidation. This is the optimum monetary policy that will ensure optimum market efficiency that maximize distributive social welfare and justice, as well as minimize injustice and inefficiency.