Central Bank’s Role as ‘Lender of the Last Resort’

This can be performed in more than one ways. An arrangement based on mutual qard-e-hasan up to a certain extent has been described above. If banks, by compulsion of circumstances, need more financing in excess of their holding of interest-free treasury bills, the central bank may be compensated by treating the funds provided by the central bank as PLS deposits of comparable duration held by the said bank. The third option is that the bank receiving the funds from the central bank may pass on to the central bank the entire income earned by the bank from use of such funds after deducting only the actual out-of-pocket expenses. Another option is that the funds obtained from the central bank may be treated as a special musharakah arrangement and the profit may be shared according to the agreement.

Dr Ziauddin Ahmad

Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.