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      Interest-Free Treasury Bonds (IFTB): Islamic Finance and Legal Clarifications

      International Journal of Islamic Business & Management

      Centre for Research on Islamic Banking and Finance and Business

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          Abstract

          Purpose: Although the treasury bill is the essential monetary instrument in central banking operations, its application in Islamic banking is not legitimate because it involves usury. This implies that the system cannot apply monetary and fiscal policies. To remove this obstacle “Interest-Free Treasury Bond” (IFTB) is introduced as a substitute for conventional treasury bills. Design: IFTB is a valuable paper which is issued by government treasury through a barter contract and is sold to central or commercial banks. The issuer is a debtor to the holder, and has to pay back the nominal value at maturity to the holder; in addition, the issuer is committed to lending a similar amount of money to the paper holder for an equal period. The Shariah and legal background of IFTB is explained through new contract types of “time-barter contract” and “time-loan contract”. Finding: IFTB is a zero-coupon, asset-backed note with no interest and is designed upon “debt equal to future loan”, or “loan equal to future debt” with “time-withdrawal right”. The paper holder can supply and transact her bond in the secondary market at a competitive price. Practical Implication: It can be used as a substitute for conventional treasury bills. All traditional and non-usury systems can implement IFTB. JEL: E43, E44, E52, E58, E62, E63

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          Author and article information

          Journal
          International Journal of Islamic Business & Management
          ijibm
          Centre for Research on Islamic Banking and Finance and Business
          2576-7682
          2576-7674
          February 26 2019
          May 22 2019
          : 3
          : 1
          : 21-29
          Article
          10.46281/ijibm.v3i1.258
          © 2019

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