CDs (Central Deposits)

Definition of "CDs (Central Deposits)"

One of the proposed monetary policy tools for the Islamic economy. The central bank may open investment accounts in member banks in which it deposits whatever money it creates and from which it withdraws whatever money it retires. Member banks may invest these deposits in the real sector in accordance with the investment policy of each bank. Profits earned on such deposits may be used to cover the cost of central bank operations. Such deposits, termed as CDs or central deposits, may be used both as a tool of monetary policy and a means of financial intermediation. The central bank may create an instrument which could be termed as ‘central deposit certificate’ or CDC. The CDCs may be invested in CDs throughout the banking system. The rate of return on the CDCs will approach the average rate of profit on investment for the whole economy. The central bank may keep CDs in foreign exchange with member banks, should it have a surplus of foreign exchange. The central bank may issue CDCs denominated in foreign currencies. The proceeds of foreign exchange thus collected may be invested through member banks. These may be utilized to meet foreign exchange requirements. The central bank may use CDs to supply domes- tic currency in return for foreign exchange earnings of the residents. This would keep the nominal supply of money from increasing beyond the desired level.