A Jurisprudential Study of Rediscount

Rediscount is the act of discounting a short-term negotiable debt instrument for a second time. Banks may rediscount these short-term debt securities to assist the movement of a market that has a high demand for loans. Among the duties of the central bank is to discount (a bill of exchange or similar instrument) that has already been discounted by a commercial bank.
This article seeks to study the legality of discounting and changing its rate. If the commercial bank’s discount documents feature a negotiable debt, the rediscounting operation of the debt would be based on interest which amounts to usury and which cannot be transacted in an interest-free loan. However, if these papers are discounted with the intention of transferring their possession to the central bank, the rediscounting operation is then considered to be purchase and sale of a debt to a third person for less than the nominal amount in which case there is no objection to it from the Shari’ah point of view. The discount rate is at the central bank’s discretion. Additionally, the central bank being the representative of the Islamic government has the right to manage liquidity by changing the discount rate, thus legalizing the central bank’s rates.