Monetary Policy in Islamic Economics and Its Application in Modern Financial Systems

Abstract

This study explores monetary policy in Islamic economics and its application in modern financial systems, emphasizing ethical, social, and economic dimensions. Unlike conventional interest-based monetary systems, Islamic monetary policy is grounded in Sharia principles, which prohibit riba (interest) and promote justice, risk-sharing, asset-backed financing, and equitable wealth distribution. This qualitative study employs a descriptive-analytical approach, drawing on secondary data sources, including scholarly literature, policy documents, and case studies from countries implementing Islamic financial systems such as Malaysia, Indonesia, and Gulf Cooperation Council (GCC) states. The findings reveal that Islamic monetary policy offers practical mechanisms, such as sukuk, profit-and-loss sharing arrangements, and Sharia-compliant liquidity tools, that facilitate economic growth and financial stability while adhering to ethical principles. Despite these advantages, the study identifies challenges in implementation, including regulatory harmonization in dual banking systems, alignment with international financial standards, and limited public awareness of Islamic financial instruments. At the same time, the growing global interest in ethical and socially responsible finance presents opportunities for wider adoption of Islamic monetary tools beyond Muslim-majority countries.