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Journal of Accounting Economic Research (JENSI) p - ISSN: 2615-1227

Volume 7 Number 1, June 2023, Page. 144 - 154 e - ISSN: 2655-187X

Implementation of Islamic Monetary

Policy in the Indonesian Economic System
Anisa Mawaddah Nasution1*, Maryam Batubara2
1.2North Sumatra State Islamic University
Corresponding Author: [email protected]*

ABSTRACT
Economic growth is a picture of the impact of government virtues that are carried out,
especially in the economic field. The challenges facing the Islamic finance industry include
resolving issues of form over substance, confronting value-based social and ethical finance,
and strengthening public trust. These challenges can only be faced if Islamic finance is based
on the monetary perspective of Islamic economics. Monetary policy aims to achieve and
maintain rupiah stability. The study is based on an analysis of the literature on conventional
monetary and Islamic monetary. Policy from an Islamic perspective has not been applied in
jurisdictions in Indonesia's economic system. This purpose is as stated in Law No. 6 of 2009
in Article 7. The purpose of this journal is to find out about monetary policy from an Islamic
perspective. This is interesting to discuss because there is a fundamental difference between
conventional monetary policy and monetary policy from the perspective of Islamic economics.
Keywords: Islamic Monetary Policy, Indonesian Economy, and Conventional Policy.

ABSTRACT
Economic growth is an illustration of the impact of the government's benevolence implemented,
especially in the economic sector. The challenges facing the Islamic finance industry include,
resolving the problem of form over substance, facing value-based social and ethical finance,
and strengthening public trust. These challenges can only be faced if Islamic finance is based
on the monetary perspective of Islamic economics.
Monetary policy aims to achieve and maintain stability in the value of the rupiah.
This research is based on an analysis of literature on conventional monetary and Islamic
monetary. Policies from an Islamic perspective have not been implemented in jurisdictions in
the Indonesian economic system. This goal is as stated in Law no. 6 of 2009 in article 7. The
aim of this journal is to understand monetary policy from an Islamic perspective. This is
interesting to discuss because there are fundamental differences between conventional
monetary policy and monetary policy from an Islamic economic perspective. Keywords: IS,
LM, Economy, Government Policy, Islam.
Keywords: Islamic Monetary Policy, Indonesian Economy, and Conventional Policy.

INTRODUCTION

Monetary policy is an Indonesian bank instrument designed in such a way that it is used to control
financial variables, such as interest rates and the level of money supply. What we want to achieve is to maintain
the stability of the value of money both against internal and external factors. The stability of the value of money
illustrates
price stability which will ultimately influence the realization of achieving a country's economic development
goals, such as meeting basic needs, equal distribution, expanding employment opportunities, optimal real
economic growth and economic stability.

Monetary policy is the most important thing in controlling the national economy. However, differences
in the prevailing economic systems will give rise to different views on monetary policy. The conventional
economic system has a different view of monetary policy than the system
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Islamic economics. The Islamic monetary economic system is an Islamic economic system that has goals to be
achieved, in Islamic monetary terms, including realizing justice and benefit. Maqashid sharia upholds justice
(Iqamah al' Adl), namely realizing justice in all areas of human life and producing benefits (jalb al maslahah),
namely producing specific benefits for certain parties.

Alignment between monetary sectors will affect the aggregate economic sector. Increasing sharia bank
financing will affect the balance of the economy which will ultimately affect economic growth. The growth of the
sharia financial system in Indonesia has increasingly developed. This can be seen from sharia monetary
instruments which have developed along with increasing performance and the level of public trust in sharia
banking. It can be seen from the increasing amount of Third Party Funds (DPK) and financing carried out by
sharia banking that in July 2021 the DOK collected by sharia banking reached IDR 504 trillion and was disbursed
in the form of financing amounting to IDR 405 trillion. The development of assets and deposits and sharia
banking financing increases every year and grows positively amid the pandemic. As of December 2020, total
sharia financial assets in Indonesia (excluding sharia shares) reached IDR 1,802.86 trillion or USD 127.82 billion.

In terms of composition, this figure is still dominated by 12 Islamic commercial banks at 65.73%.
Meanwhile, the number of sharia bank accounts has increased, as reflected in the DPK accounts as of July
2021 reaching 40 million accounts, and financing accounts reaching 6 million accounts. As well as the existence
of monetary instruments in the form of the Sharia Inter-Bank Money market (PUAS) and Bank Indonesia Sharia
certificates (SBIS) to help sharia banking liquidity.
Moreover, the character of Islamic finance shows that there is a direct link between the monetary sector and the
economic system. Increasing the strength of the sharia financial system will increase the portion of financing
distributed by sharia banking. This can be seen from the increase in sharia bank financing which has an impact
on the amount of goods and services produced in society. When people's productivity increases, the possibility
of meeting domestic needs will be met and the choice to export goods abroad will also increase. Increasing food
exports will increase the country's source of income from the foreign exchange generated which will be used to
meet domestic capital goods needs. The aim of the research is to describe the influence of Islamic monetary
policy on the economy in Indonesia. Thus, the theoretical benefit of research is that it can increase scientific
insight in the field of Islamic economics.

THEORETICAL FRAMEWORK

Understanding Monetary Policy

Monetary policy is an effort made to control macroeconomic conditions so that they can run as desired
by regulating the amount of money circulating in the economy. This effort is carried out to ensure stability in the
direction of inflation and a balanced increase in output. Almost all sectors

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The economy is bound so that the monetary sector develops faster than the real sector. This is because
the monetary sector provides profits more quickly than the real sector.
In a conventional monetary system, the instruments used as monetary policy tools are basically
intended to control the money circulating in society are waste. Meanwhile, in the Islamic system, monetary
policy does not prioritize excisional interest instruments in the market. The focus of Islamic monetary
policy is more focused on maintaining the circulation of economic resources. Thus, in simple terms,
regulators must ensure the availability of sharia economic businesses and financial products that are
capable of absorbing public investment potential. That way, the time holding money by each fund owner
will be kept to a minimum, where busy time actually benefits velocity. In other words, providing regulations
in the form of business opportunities, sharia financial products and other provisions relating to the flow of
money in society will increasingly increase velocity in the economy. One monetary policy is to control the
money supply so that it does not circulate in excessive amounts. If there is a large amount of money in
circulation, it will cause an increase in prices (inflation) which in turn can have an impact on reducing
people's purchasing power.

Monetary Policy During the Prophet's Time

The Arab economy in the time of the Prophet, was not just a backward economy
like bartering, even far from that kind of image. During the time of the Prophet there were: a. Foreign
values from Persia and Rome that were known to all levels of Arab society,
even the official means of payment are dinars and dirhams.
b. A free foreign exchange system was established, there was no obstacle whatsoever to importing dinars
and dirhams.
c. Cashless transactions are widely accepted among traders. d. Checks and
promissory notes are commonly used, for example Umar bin Khottop used this instrument when importing
new goods from Egypt to Medina. e. Factory instruments (debt factoring) which only became popular
in the 1980s have become known
with the name hiwalah, but of course free from the element of usury.
At that time, if the recipients of money increased, dinars and dirhams were imported.
On the other hand, if the demand for money falls, commodities will be imported. On the other hand, if
money receipts fall, then commodities are imported. The value of gold and silver contained in dinar and
dirham coins is the same as their nominal value, so it can be said that the supply of money is quite elastic.
Excess money offered can be converted into jewelry items. This condition can cause the demand and
supply of money to be quite stable. Rasullah's monetary policy was thus always related to the real sector.
On the other hand the currency is very stable. Both of these things bring higher economic growth and
stability.

Monetary Policy Objectives To

achieve or ensure the proper functioning of the monetary system, the monetary authority usually
supervises the entire system. Monetary sector

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is an important network and influences the real sector. Monetary policy is an important instrument
of public policy in the economic system. Monetary policy in Islam aims to: a. Economic prosperity
with full employment opportunities. This
goal is closely related to maqosid sharia. Economic prosperity takes the form of fulfilling all basic
human needs, eliminating all major sources of difficulty and improving the quality of life morally
and materially, as well as creating an economic environment where we are able to utilize our
time, physical and mental abilities for the enrichment of ourselves, our families and society.
Welfare is not maximizing wealth and consumption for oneself without regard for others, or for
other groups. Humans live in the world as caliphs of Allah. The resources provided are resources
provided to everyone. Therefore, the use of resources by individuals is permissible (legal), but
limited in such a way that it does not endanger happiness and social good. b. Socioeconomic
justice and the distribution of wealth income. Justice is putting things in their proper place. This
concept contains two elements of understanding, namely: (1) A form of balance and comparison
between people who have rights, and (2) Individual rights must be given and
handed over carefully. This justice reflects that material rewards must be given fairly for the hard
work of creativity and the contribution made to the output. Wealth is indeed the result of an
individual's hard work, but within that wealth there are other people's rights. Wealth must thus
be distributed to those who have the rights, related to this goal, central banking arrangements
must be realistic and reduce the concentration of wealth and power in the hands of a few.

c. Stability of the value of money. The stability of money has a big influence on economic life, both
ideologically and practically, because money determines the value and price of goods and
services. Not determining money results in damage to the economy, because the economy is
based on the principle of supply before demand, so predicting a price accurately is difficult.
Money stability is the main priority in Islamic monetary management activities. The stability of
the value of money, which is reflected in the stability of the price level, greatly influences the
realization of achieving a country's economic development goals, such as fulfilling basic needs,
equal distribution of income and wealth, optimal levels of real economic growth, expanding
employment opportunities and overall economic stability.

Principles of Monetary Policy

According to Wahyudi (2013), monetary policy in Islam is based on the basic principles of
Islamic economics as follows: a. The highest power belongs to
Allah and Allah is the absolute owner. b. Man is the leader of the earth, but not its
true owner.

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c. Everything that humans own and obtain is due to Allah's permission, and therefore their less
fortunate brothers have the right to some of the wealth that their more fortunate brothers have.

d. Wealth should not be continuously accumulated or

hoarded. e. Wealth must be
rotated f. Eliminating the gap between individuals in the economy can eliminate conflict between
groups. g. Establish mandatory and
voluntary obligations for all individuals, including poor members of society.

Islamic monetary policy must be free from elements of usury and bank interest. In Islam
usury, which includes bank interest, is expressly forbidden. With this prohibition, bank interest, which
in a capitalist economy is the main instrument of monetary management, is no longer valid. Monetary
management in Islam is based on the principle of profit sharing.

Islamic Monetary Policy Instruments

There are four instruments used to regulate money in circulation, namely: a. Open
market operations are when the government controls the amount of money in circulation by selling
or buying government securities .

b. The discount facility (discounto rate) is the interest rate set by the government
commercial banks provide guarantees to the central bank.
c. Mandatory reserve ratio (reserve requirement ratio) determining the mandatory reserve ratio can
also change the amount of money in circulation. If the required reserve ratio is increased, the
bank's ability to provide credit will be smaller than before.
d. Moral appeal (moral persuasion) with a moral appeal, the monetary authority tries
directing or controlling the amount of money in circulation.
Regarding the stability of the value of money as emphasized by M. Umar Chapra, the
monetary policy framework in the Islamic economy is the stock of money, the target must be to
ensure that monetary development is not excessive but sufficient to fully exploit the capacity of the
economy to offer goods and services for general social welfare (Aisyah & Nurmala , 2019).

Even though achieving the ultimate goal is no different, in its implementation in principle,
sharia monetary policy is different from conventional ones, especially in the selection of targets and
instruments. The fundamental difference between the two types of instruments is that sharia
principles do not allow guarantees regarding the nominal value or rate of return (interest rate).
Therefore, if it is linked to the implementation target of monetary policy, it is automatically impossible
for the implementation of sharia-based monetary policy to set interest rates as its operational target/
target.

The sharia monetary instruments are sharia law. Almost all monetary instruments
implementing conventional monetary policy and the underlying securities contain an interest element.
Therefore conventional instruments

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which contain interest elements (bank rates, discount rates, open market operations with interest
securities determined in advance) cannot be used in the implementation of conventional monetary
policy according to a number of Islamic economic experts, they can still be used to control money
and credit, such as reserve requirements, overall and selecting credit ceiling, moral suasion and
change in monetary base.

Money according to Islamic

Economics To fulfill their life needs, people cannot do everything alone. There are needs
that are produced by other parties, and to get them an individual must exchange them for the goods
or services they produce. However, with the progress of the times, it is impractical if, to fulfill a need,
each individual has to wait or look for someone who has the goods or services he needs and
simultaneously needs the goods or services he has. Therefore, another means is needed that
functions as a medium of exchange and a unit of value for carrying out a transaction. Long before
western nations used money in every transaction, the Islamic world had already understood this
means of exchange and measuring value, even the Qur'an explicitly stated that the means of
measuring value were gold and silver in various verses. The fuqaha interpreted the gold and silver
as dinars and dirhams.

Islamic economics clearly distinguishes between money and capital. In Islam, money is a
public good/belonging to society, and therefore hoarding money (or leaving it unproductive) means
reducing the amount of money in circulation, the implication being that the exchange process in the
economy is hampered. Apart from that, the accumulation of money/possessions can also encourage
people to tend to bad qualities such as greed, greed and laziness in doing charity (zakat, donations
and sadaqah). These unfavorable characteristics also have a negative impact on economic
sustainability (Latifah, 2015). Therefore, Islam prohibits the accumulation\hoarding of wealth,
monopolizing wealth, "al khanzu" as mentioned in QS At-Ttaubah 34-35.

Money in the view of al-Ghazali & Ibn Khaldun long before Adam Smith wrote the book "The
Wealth of Nations" in 1776 in Europe. Abu Hamis al Gazali in his book "ihya ulumuddin" has
discussed the function of money in the economy. He explained that money functions as a medium
of exchange, but money is not needed for money itself. What this means is that money was created
to facilitate exchange and determine the fair value of that exchange, and money is not a commodity.
According to Al-Ghazali, money is like a mirror that has no color, but reflects all colors. The meaning
is that money has no price, but reflects the price of all goods. In classical economic terms, it is stated
that money does not provide direct utility (direct utility function), which means that if money is used
to buy goods, then those goods will provide utility.

RESEARCH METHODS
The research method used in this article is library research. Is research carried out through
collecting data or work

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scientific writing aimed at the object of research or data collection

literature, or research carried out to solve a problem which basically focuses on a critical
and in-depth review of relevant library materials (Hughes, 2008).

The problem in this research is to find out how Islamic monetary economic policy
is implemented in the Indonesian economic system. In this section, an assessment of the
concepts and theories used is carried out based on available literature, especially from
articles published in various scientific journals.
Literature review or literature study is an activity that is required in research, especially
academic research whose main aim is to develop theoretical aspects and aspects of
practical benefit. So by using this research method the author can easily solve the problem
to be researched.

RESULTS AND DISCUSSION

Monetary Policy in an Islamic Perspective
Islamic monetary policy must be free from elements of usury and bank interest. In Islam, usury, which
includes bank interest, is strictly prohibited. With this prohibition, bank interest, which in a capitalist economy is
the main instrument of monetary management, is no longer valid. Financial management in Islam is based on
the principle of profit sharing. Other principles that exist in sound monetary policy include consideration of
government economic policy within the framework of coordinating monetary policy with other macro policies. In
accordance with the principles of good governance, namely clarity of purpose, consistency, transparency and
accountability.

In an Islamic economy, there is no interest system so the central bank cannot

implement the discount rate policy. Islamic central banks need interest-free instruments to
control economic policy and monetary economic policy in the Islamic economy. In this
case, there are several interest-free instruments that can be used by the central bank to
increase or decrease the money supply.
The elimination of the interest system does not prevent controlling the money supply in the
economy. Monetary policy is an effort made to control macroeconomic conditions so that
they can run as desired by regulating the amount of money circulating in the economy.
This effort is carried out to ensure nutrient and inflation stability as well as a balanced
increase or output. Almost all economic sectors are tied together so that the monetary
sector develops faster than the real sector.
In this case, harmony between the monetary sector will affect the aggregate economic
sector. Increasing Islamic bank financing will affect the balance of the economy which will
ultimately affect economic growth. The growth of the sharia financial system in Indonesia
has increasingly developed. This can be seen from sharia monetary instruments which
have developed in line with increasing performance and the level of public trust in sharia
banking.
It can be seen from the increasing number of Third Party Funds (DPK) and
financing carried out by sharia banking in July 2021 that DPK was successful

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Sharia banking collected Rp. 504 trillion and distributed it in the form of financing amounting to Rp.
405 trillion. The development of assets and deposits and sharia banking financing increases every
year and grows positively in the midst of the pandemic. As of December 2020, Indonesia's total
sharia financial assets (excluding sharia shares) reached IDR 1,802.86 trillion or USD 127.82 billion.
Compositionally, this figure is dominated by 12 sharia commercial banks, amounting to 65.73%.
Meanwhile, the number of sharia bank accounts has increased, as reflected in the DPK accounts
as of July 2021 reaching 40 million accounts, and financing accounts reaching 6 million accounts.
Nevertheless, the development of Islamic banks faces various challenges. Among other things,
rapid changes in the financial ecosystem due to technological changes are accompanied by changes
in people's expectations who want products and services that are more easily accessible and meet
their needs. The challenges are business scale, competitiveness, capital capacity, digital risk, cyber
security and system failure risk.
For this reason, OJK published the 2020-2025 Roadmap for the development of Indonesian
Sharia Banking (RPS2SI) as a strategic step to align the direction of development of Indonesian
sharia banking and become a catalyst for accelerating Sharia development.
Sharia banking still has weaknesses such as the business model, literacy and inclusion index,
inadequate quantity and quality of human resources and technology. So transformation is needed
to become a sharia banking that is highly competitive. The strength of the sharia financial system
will increase the portion of financing distributed by sharia banking. This can be seen from the
increase in sharia bank financing which has an impact on the amount of goods and services
produced in society. When people's productivity increases, the possibility of meeting domestic needs
will be met and the choice to export goods abroad will also increase.

Application of Islamic Monetary in

Indonesia In carrying out its central bank functions, banks based on sharia have the
following instruments: The minimum statutory reserve requirement, also known as the statutory
reserve requirement, is the minimum savings of commercial banks in the form of demand deposits
with BI, the amount of which is determined a certain percentage of third party funds. The third party
funds referred to here are eadiah demand deposits, mudharabah savings, mudharabah investment
deposits, and other obligations. Third party funds in IDR do not include funds received by the Bank
from Bank Indonesia (BI) and BPR, while third party funds in foreign currency include wadiah
demand deposits, investment deposits and other liabilities.

Sharia interbank mudharabah investment certificate. The IMA certificate is an instrument

used by sharia banks that have excess funds to gain profits and on the other hand as a means of
providing short-term funds for sharia banks that lack funds. Indonesian bank wadiah certificate.
SWBI is BI that is in accordance with Islamic sharia used in OMO. Apart from that, SWBI can also
be used by Islamic banks that have excess liquidity as a means of storing short-term funds.

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The Islamic central bank must carry out its monetary policy to produce a growth in money
circulation which includes financing potential growth in output over the medium and long term period
within the framework of stable prices and other economic targets. The aim is to ensure appropriate
monetary expansion, not too slow and not too fast, but sufficient to produce adequate growth that
can produce equitable prosperity for society. Realistic and covers the medium and long term.

To realize this Islamic target, we not only have to reform the economy and society in line with Islamic
law, but also require a positive role for the government and all state policies, including fiscal,
monetary and revenue, must be in harmony. Monopolistic practices must be eliminated and every
effort must be made to promote all factors capable of producing increased goods and services.

Conventional Monetary Policy Mechanisms The

first issue that requires in-depth attention regarding monetary policy is whether the monetary
policy process, especially the transmission mechanism, has a positive relationship to the real sector
of the economy. Because if the monetary sector does not have a direct impact on the real sector of
the economy, it is certain that the economy will develop in a circle of usury. The transmission
mechanism is a channel or mechanism that bridges monetary and economic policy.

Monetarists argue that money is very important in influencing output.

On the other hand, Keynes argued that there are other variables that also influence real output, such as
government spending. Monetary economists have recently agreed with policy makers that monetary policy
affects the real sector, at least in the short term and emphasizes the monetary transmission mechanism in the
credit channel.

Basically, monetary policy transmission is an interaction between the central bank as the
monetary authority, banks and other financial institutions, as well as other economic actors in the
real sector. This interaction occurs through two stages of the money circulation process. Firstly, the
interaction between the central bank and banking and other financial institutions in various
transactions in the financial market. Second, interactions related to the intermediation function
between the banking industry and other financial institutions and economic actors in various activities
in the real sector.

CONCLUSIONS, LIMITATIONS AND RECOMMENDATIONS

From the explanation above, it can be concluded that monetary policy is a policy issued by
the central bank or monetary authority which includes a form of controlling monetary amounts or
interest rates to achieve the desired economic goals. The aim of monetary policy is to achieve and
maintain stability in the value of the rupiah. This goal is as stated in Law no. 23 of 1999 concerning
Bank Indonesia, as amended by Law no. 3 of 2004 and Law no. 6 of 2009 in article 7 (Purwanto,
2017).

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Monetary policy in Islam is based on the basic principles of Islamic economics as the highest
power belongs to Allah and Allah is the true owner, everything that humans own and obtain is due
to Allah's permission, and therefore their less fortunate brothers and sisters have the right to some
of it. wealth owned by more fortunate brothers, wealth must not be accumulated or hoarded, wealth
must be rotated, eliminate the gap between individuals in the economy, can eliminate conflict
between groups, and establish mandatory and voluntary obligations for all individuals, including
members poor society. Islamic financial monetary instruments are sharia law.

The aim of monetary policy is to achieve and maintain stability in the value of the rupiah as
stated in Law no. 3 Tanun 2004 article 7 concerning Bank Indonesia.
There are examples of the application of Islamic monetary policy instruments in several countries,
namely Sudan, Iran and Indonesia. In conventional economic implementation, the function of money
is equated with the commodity and interest is the price. This market is a monetary market that grows
parallel to the real market (goods and services) in the form of the money market, capital market,
bond market and derivatives market. As a result, in conventional economics a dichotomy arises in
the real and monetary sectors. With the Covid 19 pandemic, Bank Indonesia is taking the following
steps in implementing monetary policy, such as continuing the rupiah exchange rate stability policy
so that it is in line with market fundamentals and mechanisms and strengthening monetary
operations strategies, accelerating steps to deepen the money market and foreign exchange market,
strengthening policy implementation. to encourage MSMEs and strengthen the digital economic and
financial ecosystem.
The suggestion that can be taken from this article is that the implementation of Islamic
monetary policy is very important to achieve economic stability and support social justice. This
article also addresses some of the challenges faced by the Islamic finance industry, such as
overcoming the problem of form over substance, adopting value-based social and ethical finance,
and strengthening public trust. Apart from that, the article also discusses monetary policy instruments
used in Islamic economics, such as the reserve ratio, moral susi, loan ratio, refinancing ratio, profit
sharing ratio, Islamic sukuk, and government investment certificates. Another suggestion is to pay
attention to the concept of money in Islam and its function as a means of communication, as well as
the importance of avoiding hoarding money and monopoly wealth.

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