Implementation of Islamic Monetary Policy in Muslim-Majority Countries

Abstract

Central banks or authorized institutions establish monetary policy to maintain currency stability and control the money supply, which is the primary focus of macroeconomic stability. Currently, both conventional and Sharia economic systems influence monetary policy globally. Although Muslim-majority countries strive to implement sharia principles in domestic transactions, they must still adopt conventional monetary policies to adapt to international transactions. This article aims to examine the implementation of Islamic monetary policy in Muslim-majority countries. This research uses a literature review method that focuses on collecting and analyzing existing literature. The results show that Muslim-majority countries such as Malaysia, Indonesia, and countries in the Middle East have made significant efforts to integrate sharia principles into their monetary systems. This development is driven by the growing awareness of the Muslim community regarding the need for financial services that align with religious values. Sharia financial instruments such as sukuk, mudharabah, and murabahah are increasingly used as alternatives to conventional riba (interest)-based instruments. However, this implementation faces various challenges, including a lack of understanding and in-depth socialization of Sharia economic principles among the public and policymakers. Other challenges include the development of innovative and liquid Islamic monetary instruments to compete with conventional instruments, harmonization of regulations and supervision between Islamic and conventional institutions, and limited human resources with dual expertise. Continuous collaboration is needed to achieve a fairer and more sustainable financial system.