Subprime Mortgage is the exit of capitalistic economy, in term of general assumption economic always developed from time to time; there will be no an economic system that able to sustain on it eternally. After the collapse of capitalistic economy, the world is looking for alternatives economic system that could endure on nowadays world eco-financial conditions. An Islamic economic system is one of those alternative system that recently being popularized. And when we talk about an Islamic system or its values it be really relevant to relate it to Indonesia as the world largest Muslims’ population. Although it is not an Islamic based country, its potential economic power to absorb the Islamic economic systems’ values could not be debated anymore. Since its establishment on 1990’s Islamic economic system especially in its banking lines succeed to reach a special place on the Indonesian peoples both from Muslim and non-Muslim community. To it, the Islamic finance also gets some privileges and a part of government intention. This paper will concern to a kind of Islamic monetary policy for that relevantly could contribute to build healthier economy; through some comparative reviews among conventional and Islamic monetary systems and policies itself.

Keywords: Subprime Mortgage, capitalistic economy, Islamic monetary system

I. Introduction

This writing begins from the assumption of there will be no an economic system that will sustainably endured over the economic development from time to time on its closed relationship with some externalities likes worlds’ trademarks on political power, supremacy of civilization and soon. An Islamic economic system ever became a dominant economic system during the Islamic golden ages   and fall a soon after renaissance. During renaissance and the development of modern economy socialistic economic system is fall after the collapse of Soviet Republic; then the world economy is dominated by liberal-capitalistic system where an Islamic economic system contribute a little part of the world’s economy. Today after a global financial crisis and the collapse of US economy which is the core of capitalistic system, the world is looking for the stronger economic system.

An Islamic economic system becomes popular and applicable on today’s world financial crisis and be an alternative for new applicable economic system. Indonesia is the biggest Muslim country on the earth; according to Indonesian Statistical Bureau (BPS) it has 237,641,326 total populations with 85.1% or around 182,570,000 of it are Muslims.[1] There will be no hesitations on its potential economic power that could be earned from ummah. But some issues will be arisen, is how an Islamic economic system will develop on a non-Islamic country like Indonesia? What is Islamic monetary policy’s instrument that could be applied? And how come Islamic monetary values could be applied in the Indonesian economy?

This writing focuses on the mainstream school of thoughts on the discussion of the base of monetary theory, element, strategies and policies building. It aims to give a figure for Indonesian Muslim peoples to be aware of Islamic economic contribution in actualization process of healthier economy.

II. Comprehensive Review on Money and its Function between Conventional and Islamic Economic System

 II.I. Conventional Perspective of Money

            On its development money is classified into some categories which are:

  1. Commodity Money or money that has an intrinsic value. This kind of money has several characteristics such as:

a)      Scarcity: Supply of commodity should be limited

b)      Durability

c)      High commodity’s value

The history is recorded that the usage of commodity’s money faced several critical problems such as; commodity’s money have no any unit of account, difficulty in saving and portability. Therefore, our ancestors shifted their mind to use others high valued metal as money. Gold and silver is commonly used to replace some commodities as money; due to its characteristics of durability, portability and measurements.

  1. Token Money

This kind of money is raised where some parties like banks, goldsmiths and several jewelers’ stores issued receipts of gold and silver that became well accepted by the community. Those receipts is generally accepted and were conducted as the replacement of their high-valued metals; with compared to the metals, a receipt is more portable and could be breakdown into more unit of account.

  1. Deposit Money

This kind of money is established by commercial banks through cheque or another form of money. It is used to be conducted as money in general perspective. Deposit money is more liquid and save with compared to another moneys. People could detect their lost deposit money and having its portability and lower cost. Some economist presumed that this kind of money is the source of bubble economic; when there is no balance between money supplies in the real sectors is lower than the interest rates with refer to some banks’ instruments.

II.II. The Conventional and Islamic function and motive to hold money

            In general term there are some major functions of money; first, as a medium of exchange, standard of value, sore value, unit of account and standard of deferred payment; those functions are applied for every currency all over the world. And in term of motive to held money Keynes came with three motives of people to hold money which are:

  1. Motive to exchange it for other goods or services
  2. Precautionary motives
  3. Speculation

There is fundamental diversity between conventional and Islamic economic system on how they view money, its functions, and peoples’ motive to hold on it. In term of money’s function conventional economic system assumes money as ‘commodity’ and they could sell it anytime they desired to do so; they take an interest rate as the cost of money. Karim Adiwarman, (2006)

There are no significant differences among convention economy and Islamic economic system in term of motivation to hold money; both of them are used money to exchange it with another goods and services and also for precautionary purposes. There is no controversy on the transactional motive but, in term of precautionary motive some of Islamic scholar argued that it could be classified as a speculation action and close to gabling. But still the majority of ulama argued that in term of human life, human beings will face some uncertainty of life, they never know what will happens in their future life. Therefore the majority of ulama permit some precautionary action on human beings life. But the thing will be different in term of demands’ motive of money for speculation. Some economists and scholars’ belief that the speculation motive of Keynes refers to bad speculative behaviors such as gambling on stock market, play with foreign currencies etc. This is the crossing point where conventional economic system and an Islamic economic system are differed.

III. Theory’s of money demand development

            In general acknowledgment there are three classification of demand for money’s theory; first, before-Keynes money’s demand theory, Keynes money’s demand theory and after Keynes money’s demand theory.

  1. Classical theory

a. Fisher’s theory of money demand


M : The amount of money supply
V : Velocity of money
P : Prices’ level
T : The amount of goods and services

On this theory some Fisher assumed that the amount of money does not influenced by an interest rate but it is influenced by how fast its velocity on an economy. It can be concluded that according to Fisher money could not be conducted as a commodity.

b. Marshall and Pigous’ theory of money demand

Md = cY

Md : The amount of money demanded
c : Constanta shows the percentage of hold’s money compared with people income
Y : Nominal income

According to Marshall and Pigou money is conducted more to be a store value, not for transactional motive. According to them the amount of money demanded is influenced by an interest rate, the amount of wealth, the expectation of high interest on the future economy, and the price level. To them those factors are constant in short term period, it will changes depend on the proportional of personal income.

            Those two different argumentations becomes the source of confusion among some economists. But for other circumstance it is close to the Islamic perspective in term of money.

  1. Keynesian theory of money demand

As the earlier discussion Keynes came with three motives of people to demand money. Those motives are derived into this equation:

Md = Mdt + Mdp +Mds

M : The amount of money supply
Mdt : Money demand for transaction
Mdp : Money demand for precaution
Mds : Money demand for speculation

  1. Post-Keynesian theory of money demand (Friedman’s theory)

Md = k(r1,………rj)y

Md : The amount of money demanded
r : Rate of return
1,………r : Kind of property including the interest rate

According to Friedman the amount of total money demanded is tend to be influenced by national income. The different among Friedman and Keynes is that Friedman argued that ‘k’ is not constant, the amount of ‘k’ is influenced by the interest rate and another factors. He argued that national income could be earned not only in the full-employment condition but also under full-employment time.

  1. Islamic theory of money demand

Generally Islamic economy has three major functions and motives of peoples to demand money. First, as an exchange tool; second, as a store value; money as flow concept or to be conducted as public good.

Due from its development there are several theories on money demand in Islamic economic system.

  1. Iqtishaduna school of thought money demands’ theory (Baqir As Shadr)

Md = Mdt + Mdp

According to this school of thought, money is functioned for transaction and investment or other precautionary purposes. The money demand for transaction has a positive relationship with personal income.

  1. Mainstream school of thought (Dr. Umer Chapra)

Md = Mdt + Mdp à Md = f(Y/µ)

Md : The amount of money demanded
Y : Income
µ : Dues of idle cash

According to Metwally the demand of money is functioned as a transaction and precautionary tools. ‘Dues on idle cash’ is a major instrument of monetary policy for them.

  1. Alternative school of thought (Dr. M.A. Choudury)

Md = f (rPLS + y + p + G + X + Y)

Md : The amount of money demanded
rPLS : Profit and lost sharing ratio
y : Nominal Income
p : Price level or inflation rate
G : Government expenditure
X : Socio-economic variables
Y : Government policy

Total money demand is a representative of real sectors transactional acts, it has positive relationship among them.

With concern on details of each mentioned theories, there is primary difference among conventional and Islamic school of thoughts theories especially with refers to Keynes and after Keynes theory with Islamic theory. In term of Keynes and after Keynes theory, they are focused on the role of interest rate while the Islamic theory tend to examine money demand with relate to profit-lost sharing and investment as a precautionary purposed activities. Islamic theory is closer to the classical school of thought in term of money’s cost. The transmission of those theories will be discussed on latter chapter. In further discussion we will focus on Islamic money demands’ theory rather than the conventional one; we will particularly examine on mainstream theory and describe another details of Chapra’s idea of Islamic monetary policy’s formulation.

IV. Profits and lost shearing/PLS and the ‘dues of idle cash’ as the major instruments to form an Islamic monetary policy

            Before step to further discussion on Islamic monetary policy, we should first examine how conventional economic system maintained its monetary policy. Commonly there are several major conventional monetary policies which are first, open market operation, reserve requirement, discount rate and moral suasion. Some conventional monetary instruments such are governments’ securities, interest rate play a major role on those mentioned policies. The three interest-based policies are against a fundamental principle of Islamic economic which justice and economic-social welfare is.

            To form a firm Islamic monetary policy which is applicable on the actualization of Islamic economic values on an economy, Umer Chapra came with several strategies to build an applicable monetary policy Chapra develop the abolition of riba’ with its replacement by profit and lost shearing/PSL and the principle of ‘dues of idle cash’. For sure that those strategies face some objection that tend to declare an interest is the absolute instrument in term of money with refer to its capital-stock concept, where money is conducted as a private good with interest as the cost of it. To face that contradiction Chapra argued that in an Islamic economy there will be no free-money; in fact that Islam is looking for another measurement that fulfill the requirement of justice and social welfare. Chapra argued that an Islamic economy charges money by the ratio of profits; and as the implementation of justice and social welfare he purposed to shift a risk of losing money for both lender and borrower party.

            The principle of ‘dues on idle cash’ becomes one of major strategy beside the abolition of riba’. This principle contradicts all conventional money demand theories mentioned earlier. Whet the conventional economic system rewards the people who save their money in idle condition, it will served by some amount of interest fees on it, and the Islamic economy suggests to allocate peoples’ idle cash to productive activities. Where they have an idle or progressive asset it will be charged with some dues on zakat; and after time to time the idle assets will decrease and decrease.

            With relate to the above strategies it will make short as well as long-term investment opportunities are relatively available with regard to investors’ will to allocate their idle assets to some productive business through PSL scheme in order to offset their expected returns rather than interest returns. In term of PLS scheme the rate of profit is post-determined unlike an interest rate. There will be pre-determined profits’ sharing ratio.

V. Islamic Monetary Policy

            There is no any doubt that Islamic economics is not a new discipline of science. It has been established seen on the prophetic period and experienced some fluctuation on its development. The paper starts from Chapra’s argumentation on the theory of money demands. Chapra argued that there is a positive relationship among total money demanded, national income, and welfare economy with the development of real sectors due to its capacity to create new employment, increasing on GDP, aggregate consumption and well-economic long-term stability.

            Some scholars agreed that to build an Islamic monetary policy a deep understanding on the principle of Islamic value and examining on the Islamic precedents on monetary issue are extremely needed. Some economic terminology such as foreign currency, cash and non-cash transaction, cheque and promise’s note are commonly conducted on the prophetic period. The specific monetary policy even conducted by Prophet (pbuh); when the stocks of gold and silver (dinar and dirham) are decreased and the scarcity is happened on it the Prophet export some gold and silver and vice verse. It reflects that Prophetic monetary policy is deserved to be referred. Mainstream school of thought describe that the fundamental motives of people to demand money and interest rate as the major difference among Islamic and conventional monetary system.

            The core of Islamic monetary policy is that there should be a stable domestic currency and the balance of money demanded and supplied. Currency’s stability reflects economic price level that project the development of national socio-economic goals such as the fulfillment of society’s basic needs, a just distribution of income and wealth, full-employment, real sectors’ development and middle-term economic stability. Islamic monetary of Islam suggests people to demand money only for clear and valid motivations. They should avoid extravagant consumptions and any forms of bad speculative behaviors. Islam suggests them to be moderate on their transaction and demand money only for validated precautionary purposes. The implementation of that suggestion will stimulate the allocation of money to real sector and indirectly build national goals; beside some allocations for social-oriented activities such zakat or another charities.

            Another element that could not be avoided easily due to the development of the world financial and monetary sectors is the high-powered money. It might influence the balance among Md and Ms is a high powered money Mo; some critical problems arise from such kind of money which is steamed from several causes; first, fiscal deficit; second, commercial bank credit creation and balance of payment surplus.

            Excessive government expenditures over its budget and the incapability of it to manage their budget stimulate them to borrow from central bank. This kind of wasteful behavior really burden national monetary sector. Therefore the management on high-powered money is a necessity to maintain economic stability. To implement Islamic monetary policy the central bank should really concern and careful in using money; central bank should examine it credit allocation to others commercial banks with profits lost shearing to abolish interest based conduct. As same as the central bank carefully allocate their credits to commercial banks, the commercial banks also should be selective to find appropriate entrepreneurs. It will prevent money demand from unproductive wasteful consumptions. Finally when government experienced balance payment surplus, the allocation of surplus must in accordance to domestic economic capacity in absorbing those surplus; so that inflationary impacts could be minimized.

VI. Conclusion

             In sort description starting from conventional monetary instruments which are open market operation, discount rate and reserve requirement are involved on interests could not be accepted. Some modification of available instruments with refers to syariah compliance could be figured such what Islamic school of thoughts defined. First, Iqtishaduna school of thought argued the early Islamic era has no any form of monetary policy, due to the stability of Islamic currency (dinar and dirham) and the balance between money supply and amount of goods and services produced at that period; second, mainstream school of thought tend to maximize available resources (money demand) to productive economic activity through ‘dues on idle cash’ principle able to allocate those potential resources to the real sectors that stimulate long-term economic stability as whole; third the alternative school of thought argued that any form of monetary policies should be in harmony with real sectors condition, it must pass the mechanism of “syuratiq process”.

VII. Recommendation

            This writing is merely theoretical conduct that needs to be verified with future research particularly in term of how effective and relevant those theories on its application in the real world.



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Chapra M. Umer, Masa Depan Ilmu Ekonomi Sebuah Tinjauan Islam, Jakarta: Gema Insani Press,  2000.

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Abdul Azim. Islahi, Contribution of Muslim Scholars to Economic Thought and Analysis, Jeddah: Scientific Publishing Center King Abdul Aziz University, 2005.

Muhammad, Kebijakan Fiskal dan Moneter Dalam Ekonomi Islam, Jakarta: Salemba Empat, 2002.

Antonio M. Syafi’i, Bank Syariah Dari Teori Ke Praktik, Jakarta: Gema Insani Press, 2001, Tazkia Cendikia.

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[1] Compiled data from Indonesian Statistical Bureau (BPS) and Wikipedia online encyclopedia