Islamic Bank Financing and Price Stability in Indonesia: Assessing the Role of Interest Rates as a Potential Constraint

Today, a country maintains price stability to achieve economic stability. Price stability is essential for achieving overall economic stability in a country. Ensuring price stability requires reforms in regulatory and legal institutions responsible for fiscal and monetary policy. However, it can also be undermined by economic vulnerabilities resulting from flawed domestic financial policymaking. This study analyses the effects of various Islamic banking financing schemes—namely murabahah, mudharabah, musyarakah, istishna’, qardh, and ijarah—on price stability in Indonesia. Additionally, it examines the moderating role of interest rates on the relationship between Islamic financing schemes and price stability. The study employs monthly time series data from January 2009 to March 2024 (a total of 183 months). The findings reveal that interest rates, qardh financing, and ijarah financing negatively affect price stability. In contrast, musyarakah financing contributes positively to price stability, while murabahah and mudharabah financing show no significant impact on price stability. Further, the results from the second model indicate that the moderation of interest rates enhances the stabilizing effect of murabahah financing. However, interest rate moderation weakens the stability effect of musyarakah, istishna’, and ijarah financing. Therefore, it is imperative for Bank Indonesia, as the policymaker, to carefully design and implement policies that effectively maintain price stability, especially considering its tendency to fluctuate significantly in Indonesia.