A Macroeconomic Framework without Interest: IS–LM Dynamics in Islamic Economics

Abdul Mujib*    -  Universitas Islam Negeri Sunan Kalijaga, Yogyakarta, Indonesia
Rahmatullah Rahmatullah    -  Universitas Islam Negeri Sunan Kalijaga, Yogyakarta, Indonesia
Kaipal Wahyudi  -  Universitas Islam Negeri Ar-Raniry, Banda Aceh, Indonesia
Fahmi Makraja    -  Universitas Islam Negeri Sunan Kalijaga, Yogyakarta, Indonesia
M. Fijar Ishlahul Ummah  -  Ez-Zitouna University, Tunisia, Tunisia

(*) Corresponding Author
DOI: 10.30659/jua.v9i2.46554

Purpose - The reliance on interest rates in conventional macroeconomic models, particularly within the IS-LM framework, creates a fundamental incompatibility with Islamic economics, where interest (ribā) is strictly prohibited. This incompatibility gives rise to a theoretical gap in the development of macroeconomic models that are aligned with Islamic law (sharīʿah) principles while maintaining analytical robustness. This study aims to reformulate the IS-LM model into a sharīʿah-compliant macroeconomic framework by eliminating the interest rate variable. In its place, a profit-sharing rate (π) is introduced as the primary determinant of investment and money demand.

Methodology/approach - To achieve this objective, the research adopts a theoretical and mathematical approach, reconstructing both the IS and LM curves. The proposed model integrates Islamic fiscal instruments, such as zakah, alongside interest-free monetary instruments, including Islamic bonds (sukuk). Concurrently, behavioural functions are modified to reflect incentives oriented toward the real sector, in line with the values of Islamic economics.

Findings – This study demonstrate that macroeconomic equilibrium can be achieved without reliance on interest rates. Instead, equilibrium is driven by profitability mechanisms and asset-backed financing structures, which ensure a closer linkage between the financial sector and the real economy. The significance of these findings lies in providing an alternative analytical framework for policymakers, particularly in Muslim-majority countries. Such a framework enables the design of effective fiscal and monetary policies that are also consistent with sharīʿah principles.

Conclusion - The proposed IS-π/LM model offers a viable and coherent macroeconomic framework. It replaces interest-based mechanisms with profit-sharing arrangements, thereby supporting the development of a distinct, ethical, and productivity-oriented Islamic economic paradigm. Moreover, the model contributes to the theoretical advancement of Islamic macroeconomics by offering a structured and operational alternative to conventional interest-based systems.

Keywords: IS-LM Model; Interest-Free Economy; Islamic Macroeconomics; Profit Sharing; Sharīʿah Instruments

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Open Access Copyright (c) 2026 Abdul Mujib, Rahmatullah, Kaipal Wahyudi, Fahmi Makraja, M. Fijar Ishlahul Ummah
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ISSN: 2597-6168 (Print)
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DOI : 10.30659/jua

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