Effectiveness of Monetary Policy Transmission on Credit and The Real Sector from An Islamic Monetary Perspective

Abstract

The effectiveness of monetary policy in a dual banking system cannot be adequately assessed through interest rate changes, credit growth, or increased Islamic financing. A more fundamental question is whether changes in monetary conditions generate additional productive activity with equitable risk distribution. This article aims to explain the barriers to monetary transmission to credit and the real sector and formulate policy improvements based on an Islamic monetary perspective. The research employs a critical integrative literature review with a targeted search of academic publications and official documents available through October 22, 2026. The analysis compares mechanisms, findings, identification limitations, and institutional relevance; no new econometric estimates are performed. The synthesis shows that evidence regarding the response of Islamic financing to monetary policy is heterogeneous, while changes in financing volume do not necessarily prove additional output or welfare. The article develops a four-layered evaluation framework encompassing price transmission, quantity, allocation, and real impact. Within this framework, Islamic monetary principles are translated into linking transactions to economic activity, risk sharing according to contracts, cost transparency, and protection of vulnerable business actors. Proposed solutions include liquidity incentives based on additional productive financing, strengthening Islamic money markets, reporting financing costs according to contracts, partnership financing supported by cash flow data, and benchmark-based impact evaluation. The article's contribution lies in linking transmission effectiveness with allocation quality and impact accountability, not in claiming automatic superiority of Islamic banking.