How would an interest free economy operate?

I have been told that in Islam, interest (ribaa) is haraam. I have also seen Islamic banks that skirt around this through the use of things like "service fees" and operating differently than a regular private bank in the west would. But that's not what I want to ask about - I want to look at a macro-economics level (in particular, monetary policy), and not simply at individual banks.

In nearly every country today, there is a central bank (in America, this is the Federal Reserve, in Saudi, the Saudi Arabian Monetary Authority, etc). This central bank prints money for the economy, then loans it to the other banks (or credit unions) at a certain interest rate, known as the federal interest rate. The central bank's ability to alter this interest rate is the most powerful tool within monetary policy, as they can then control the amount of money in the economy. In simple terms, increasing the interest rate -> less money to prevent inflation, and decreasing the interest rate -> more money to stimulate the economy.

Without interest, such a central bank would lose their most powerful tool in keeping the economy stable. The next best solution would have to be an entirely new system of economics.

If interest is haraam within an Islamic economy, then what is the alternative to this system? This is only the surface of the questions I have - how would investments such as bond markets and short term securities work in an interest free economy? People always seem to talk about getting interest-free car loans or whatever, but never seem to discuss on a macro level.

submitted by /u/III_lIIIIlIIIII
[link] [comments]

from Islam https://ift.tt/2HdHQZ2