Islamic Monetary Policy in Theory and Practice with Reference to the Digital Era

In this research we took a stock of Islamic Monetary Policy in Theory and Practice with Reference to the Digital Era. Our study shows that both in theory and in practice, the Islamic monetary policy instruments are discussed and practiced. However, not all good theoretical ideas are applicable in practice. The practice itself is not uniform across countries. The influence of conventional instruments and traditions are overwhelming; sparsely available Islamic instruments also replicate the traditional instruments. This is also partly because the practice of Islamic banking is to certain extent converging with the conventional banking by replicating the core mechanisms, mainly Tawaruq and I'nah. These also reflect in the available monetary policy instruments. Our main addition to the existing literature is extension of the discussion into the digital era. We discussed some prospects. Robust systemic liquidity is the more serious need of the Islamic banking system. We suggested a potential solution in this regard. One of the prospects is the potential room for utilization of Smart contracts for enhancing systemic liquidity for Islamic financial institution. With certain level of Islamic financial engineering, a Musharakah certificate can be created with Call and Put options. The Call and Put Options can be invoked through Smart contract triggers contingent upon threshold conditions of key liquidity and stable funding ratios. This is a major suggestion that need further study in the potential digitization of economies, assets, and monetary policy.