The Palestinian Economy and the Absence of a Monetary Policy.

Islam allowed the selling transaction and prohibited the interest rate. So, can an economy function properly and efficiently without an interest rate? In a conventional economy the interest rate is used as a tool to stimulate investment, savings, money supply, exchange rate, and other economic variables. Thus, the concept of an interest rate is deeply embedded, and plays a vital role in an economy. It is not easy to remove this concept from an economy. The purpose of this paper is to demonstrate that an economy can function properly without the use of an interest rate by looking at the Palestinian economy. The Palestinian economy is a small, open, and semi-independent on the Israeli economy; it is thus unique in nature, where it is an economy that has no local currency. Palestinians use the New Israeli Shekel, US Dollar, Jordanian Dinar, and Euro. So, the Palestine Monetary Authority (PMA) place the role of monitoring the function of the banks, rather than the role of a Central Bank. This is of course due to the absence of a local currency. Therefore, the Palestinian Government has no monetary policy, i.e., monetary policy does not exist in the Palestinian economy. In addition, the concept of an interest rate to an individual Palestinian can be replaced by the concept of profit sharing. That is, a Palestinian can be driven by the concept of profit sharing rather than the concept of an interest rate. This paper concludes by using an empirical example that an economy can function without an interest rate. [ABSTRACT FROM AUTHOR]