Central Bank Digital Currency (CBDC) Shariah System for Islamic Bank Liquidity Management

Abstract

The project of Central Bank Digital Currency (CBDC) in many nations is currently focused on conventional characteristics. The majority of the current research has concentrated on the monetary policy ramifications of a retail central bank digital currency (CBDC) that bears interest and operates on a single tier system. CBDC implementation will result in liquidity challenges for Islamic banks. This approach is only suitable for conventional mechanisms of liquidity management, such as the interbank market, secondary market financial instruments, the central bank discount window, and the Lender of Last Resort (LOLR), which are all interest-based. Islamic banks are prohibited from engaging in such activities. This study employed a literature review to investigate the design of Central Bank Digital Currency (CBDC) in accordance with sharia principles and its potential to mitigate the risk of Islamic bank liquidation. The incorporation of Central Bank Digital Currency (CBDC) into the monetary system is an unavoidable development. A retail CBDC, which is not subject to remuneration and does not experience value fluctuations, is considered legally permissible for usage in accordance with Islamic law, as it functions as a fiat currency solely for the purpose of exchange. To help the liquidity of Islamic banks due to use of CBDC, Central banks, therefore, need to either modify traditional instruments or to develop new Sharia’h compliant monetary policy instruments for mechanisms of liquidity management. It is proposed that an integrated e-wallet system adhering to shariah principles should be developed, incorporating a two-step transaction verification process that involves both the user and sharia boards. This system can be compared to Islamic coin. This system guarantees that transactions involving CBDC comply with the principles of Sharia, as defined by Islamic Coin through the use of HAQQ Wallet and Oracle Shariah. This method enables Islamic banks to utilize CBDC in a range of market products that adhere to sharia rules, serving as a means for managing liquidity.