Rate of Profit as a Monetary Policy Tool for Financial Stability

Abstract

This chapter provides a fundamental research to find a replacement of the Central Bank of Indonesia (BI) policy rate as a reference rate for the Islamic financial transactions. The replacement of BI policy rate as a reference rate for Islamic banking is important, given that the BI policy rate (noncontractual) has been replaced by the BI 7-day repo rate, which is a contractual rate. The reference rate is determined by the supply and demand of borrowing transaction using the instrument of SBI (Bank Indonesia Certificate) in conventional money markets that are not based on the rate of profit derived from financial transactions in the real sector, which is in accordance with the principles of Islamic economics. The use of Shari’ah Reference Rate as a substitute for BI policy rate as a monetary operation tool is very important in determining the rate of profit for Islamic financial transactions. The reference rate affects the short- and long-term rate of return for Islamic banking transactions, which will determine the price of financing rate, the price of deposit rate, the price of bonds, and the net worth of asset liability management of Islamic banks. The study shows that the use of Shari’ah Reference Rate is expected to create stability in the Islamic financial market and to achieve the equitable distribution of income and wealth in accordance with Maqasid al-Shari’ah.