diff --git a/CHANGES.rst b/CHANGES.rst
index 0933c9c6a9fadc5ea1bf31cef7cbd4f90b6c4b70..802e7539cde35bf18d1e1d59a9a0c9bd591e2b2b 100644
--- a/CHANGES.rst
+++ b/CHANGES.rst
@@ -140,6 +140,9 @@ Smart Rollup node
 - Fix issue when connecting to Octez nodes behind a proxy that can rearrange
   chunks. (MR :gl:`!20057`)
 
+- Fix issue where setting for ``l1_monitor_finalized`` would be ignored from the
+  configuration file. (MR :gl:`!20239`)
+
 Smart Rollup WASM Debugger
 --------------------------
 
diff --git a/src/lib_smart_rollup_node/cli.ml b/src/lib_smart_rollup_node/cli.ml
index 7f498b62ef7c74f73cc03391a61036708bdb2de7..889aa2f1c7c068cc4453dbf1055951391f825fb6 100644
--- a/src/lib_smart_rollup_node/cli.ml
+++ b/src/lib_smart_rollup_node/cli.ml
@@ -653,8 +653,12 @@ let etherlink_switch : (bool, Client_context.full) Tezos_clic.arg =
     ~doc:"Force this rollup to be detected as an Etherlink rollup"
     ()
 
-let l1_monitor_finalized_switch : (bool, Client_context.full) Tezos_clic.arg =
+let l1_monitor_finalized_switch :
+    (bool option, Client_context.full) Tezos_clic.arg =
   Tezos_clic.switch
     ~long:"l1-monitor-finalized"
     ~doc:"The rollup node will only monitor finalized blocks of the L1 node"
     ()
+  |> Tezos_clic.map_arg ~f:(fun _ -> function
+       | true -> Lwt_result_syntax.return_some true
+       | false -> Lwt_result_syntax.return_none)
diff --git a/src/lib_smart_rollup_node/configuration.ml b/src/lib_smart_rollup_node/configuration.ml
index 76d598a0d32f045c0dea376a2fd10a491a328f45..39ed53af176a827063b8866ea15673a82c7a7519 100644
--- a/src/lib_smart_rollup_node/configuration.ml
+++ b/src/lib_smart_rollup_node/configuration.ml
@@ -967,7 +967,10 @@ module Cli = struct
         l1_blocks_cache_size = default_l1_blocks_cache_size;
         l2_blocks_cache_size = default_l2_blocks_cache_size;
         prefetch_blocks = None;
-        l1_monitor_finalized;
+        l1_monitor_finalized =
+          Option.value
+            l1_monitor_finalized
+            ~default:default_l1_monitor_finalized;
         l1_rpc_timeout = default_l1_rpc_timeout;
         loop_retry_delay = default_loop_retry_delay;
         index_buffer_size;
@@ -1112,7 +1115,10 @@ module Cli = struct
           (match profiling with
           | None -> configuration.opentelemetry
           | Some enable -> {configuration.opentelemetry with enable});
-        l1_monitor_finalized;
+        l1_monitor_finalized =
+          Option.value
+            l1_monitor_finalized
+            ~default:configuration.l1_monitor_finalized;
       }
 
   let create_or_read_config ~config_file ~rpc_addr ~rpc_port ~acl_override
diff --git a/src/lib_smart_rollup_node/configuration.mli b/src/lib_smart_rollup_node/configuration.mli
index 8e0626aa6a7ba66c7e3f36d3bbe0b9da7fcb36e9..e37693a94c9960e13162ffd20709ded005194af4 100644
--- a/src/lib_smart_rollup_node/configuration.mli
+++ b/src/lib_smart_rollup_node/configuration.mli
@@ -283,6 +283,9 @@ val default_irmin_cache_size : int
    details such as a timestamp, message content, severity level, etc. *)
 val default_index_buffer_size : int
 
+(** Default setting for monitoring finalized heads of L1 node. *)
+val default_l1_monitor_finalized : bool
+
 (** Encoding for configuration. *)
 val encoding : t Data_encoding.t
 
@@ -332,7 +335,7 @@ module Cli : sig
     bail_on_disagree:bool ->
     profiling:bool option ->
     force_etherlink:bool ->
-    l1_monitor_finalized:bool ->
+    l1_monitor_finalized:bool option ->
     t tzresult Lwt.t
 
   val create_or_read_config :
@@ -370,6 +373,6 @@ module Cli : sig
     bail_on_disagree:bool ->
     profiling:bool option ->
     force_etherlink:bool ->
-    l1_monitor_finalized:bool ->
+    l1_monitor_finalized:bool option ->
     t tzresult Lwt.t
 end
diff --git a/src/lib_smart_rollup_node/rollup_node_daemon.ml b/src/lib_smart_rollup_node/rollup_node_daemon.ml
index 0b06a17998de8cd42ad6c00080259b393a0d6021..01443d56da9beab53d849caddaf41e01c08119fb 100644
--- a/src/lib_smart_rollup_node/rollup_node_daemon.ml
+++ b/src/lib_smart_rollup_node/rollup_node_daemon.ml
@@ -1066,7 +1066,7 @@ module Replay = struct
         ~bail_on_disagree:false
         ~profiling
         ~force_etherlink:false
-        ~l1_monitor_finalized:false
+        ~l1_monitor_finalized:None
     in
     let* cleanup = setup_opentelemetry ~data_dir configuration in
     let* node_ctxt =