Fractional Reserve Banking as a Challenge to the Implementation and Stability of the Modern Islamic Monetary System

Abstract

This study examines the problems of the Fractional Reserve Banking (FRB) system from the perspective of Islamic economics and how society perceives its benefits and risks. The research problems include how Islam and fiqh muamalah view the practice of FRB, how FRB is applied in Islamic banks, and how society perceives it as well as the potential alternatives that align better with sharia principles. This research uses a descriptive qualitative method through library research and structured interviews. The findings show that while FRB provides benefits in stimulating economic activity, it is considered problematic from a sharia perspective because it opens potential harms such as riba, inflation, and economic instability. Its implementation in Islamic banks is driven more by national regulations than ideological foundations, creating a dilemma between sharia ideals and the demands of the modern monetary system. Society acknowledges the usefulness of FRB yet recognizes its risks, and many support alternatives such as 100% full reserve banking and free-interest banking implemented through mudharabah and musyarakah contracts. The study concludes that reforming the Islamic banking system should move toward a model that is more stable, just, and aligned with the maqasid al-shariah.