Given that the inherent principle of Islamic finance requires that financial transactions be accompanied by underlying economic activity, it already ensures the close link between the expansion in financial assets with the real economy. As the Islamic financial system transitions from being banking centric to becoming more diversified and comprehensive, it has been able to provide the spectrum of financial products and services to the range of activities in the economy, as required by small businesses to conglomerates, and by households to the high networth individuals. The development of intermediaries that previously was dominated by banks now comprises the range of financial institutions that also includes investment banking, specialised banking institutions, takaful, capital market intermediaries and microfinancial institutions. Financial  BIS central bankers’ speeches  1  markets, including the Islamic money and sukuk markets have been instrumental in intermediating funds in the Islamic financial system. The Islamic money market not only facilitates liquidity management but also the implementation of monetary policy. The sukuk market has facilitated the raising of funds by businesses, while providing investors with a range of instruments for investment, thereby facilitating the mobilisation and allocation of funds to productive economic activity. Accompanied by research and development, innovation has intensified. Islamic finance however has the governance arrangements which require the approval process by the Shariah advisories. This ensures avoidance of the creation of financial instruments that have its origins from other financial instruments.
In a totally closed, national, economy I suspect that the most effective way of achieving this would be to aim to stabilise the rate of consumer price inflation – at some very low level representing effective price stability. We might, certainly, as an intermediate step aim to stabilise the rate of growth of the money supply, if we were confident that the demand for money was sufficiently stable and predictable, but the reason for targeting the growth of the money supply would ultimately be to stabilise the rate of inflation, so the distinction is operational rather than substantive. But it is important to understand that effective price stability would not be intended simply as an end in itself. In order to maintain price stability, what in fact we would need to do is to keep overall demand in the economy continuously broadly in line with supply-side capacity, so that the actual rate of inflation is really a measure, or barometer if you like, of our success in maintaining macro-economic stability in a much wider sense. If we succeed in maintaining such stability, that would also contribute, indirectly, to improving the supply side of the economy by reducing nominal uncertainty as a factor in spending or saving or investment decisions and thereby improving resource allocation. Macro-economic stability in this sense can of course be affected by either overall fiscal policy or by monetary policy.