The Role of Profit Rate in Islamic Monetary Policy

Abstract

Extensive research has been done regarding the Islamic pricing benchmark, both in terms of the Islamic jurisprudence (Fiqh) and Islamic economic perspectives. However, there is no in-depth study on the substitution of the interest rate concept to date in the application on the Islamic banking pricing product. This chapter will initiate the difference between the concepts of rate of profit, rate of interest, and practice in the field. Some jurists from the Middle East allow the use of a benchmark rate, such as the London Inter-bank Offered Rate (LIBOR), as a measure of Islamic financial asset prices. They equate the concept of rate of interest with the concept of rate of profit. This is the core reason (raison d'être) for the replacement of usury as instructed in the Qur'an. This study will discuss a financial asset pricing methodology in accordance with the core principles of Islam.