The Evolution of Monetary Policy: Analyzing Reserve Ratios and Their Shari’ah Implications

Abstract

The concept of monetary policy, emerging prominently in the nineteenth century, has evolved into a fundamental aspect of economic governance, especially during times of crisis and instability. Influential economists, including Keynes and Alfred Marshall, contributed significantly to the literature, addressing monetary issues through scholarly articles and research during periods of economic turbulence. The systematic study of monetary policy gained momentum throughout the twentieth century, reflecting the need to understand and manage recurrent economic cycles. This paper explores the multifaceted nature of monetary policy, focusing on key concepts such as the reserve ratio, its objectives, and the mechanisms underlying this policy. Additionally, it provides a Shari’ah analysis of the reserve ratio, examining its implications within various frameworks, including the Wadi’ah agreement, Rahn (pledge), and Qardh (loan). The discussion also encompasses the statutory reserve ratio, highlighting its role in achieving stable economic goals. Through this comprehensive analysis, the paper underscores the integral relationship between monetary policy and the broader economic objectives of the state.