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Roles of the Islamic banks in the monetary transmission process in Malaysia

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Author Info

  • Raditya Sukmana
  • Salina H. Kassim

Abstract

Purpose – This paper aims to determine the importance of the Islamic banks in the monetary transmission process in the Malaysian economy. In particular, the paper analyzes the relevance of Islamic banks' financing and deposit in channelling the monetary policy effects to the real economy. Design/methodology/approach – The paper relies on the co-integration test, impulse response functions, and variance decomposition analysis, focusing on the period from January 1994 to May 2007. Findings – The results show that both Islamic banks' financing and deposit play important roles in the monetary transmission process in the Malaysian economy. In particular, both Islamic deposit and financing are shown to be statistically significant in linking the monetary policy indicator to the real output. Practical implications – The results imply that the monetary authority should also consider the Islamic banks in the implementation of monetary policy in Malaysia. The results also imply that ensuring the stability of the Islamic financial institutions is just as important as that of the conventional counterpart to achieve an effective transmission of monetary policy in the economy. Originality/value – This paper is a pioneer study undertaking empirical investigation on the role of Islamic banks in the monetary transmission process in an economy.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal International Journal of Islamic and Middle Eastern Finance and Management.

Volume (Year): 3 (2010)
Issue (Month): 1 (April)
Pages: 7-19

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Handle: RePEc:eme:imefpp:v:3:y:2010:i:1:p:7-19

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Related research

Keywords: Banking; Islam; Malaysia; Monetary policy; Money markets;

References

References listed on IDEAS
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  1. Eu Chye Tan, 1997. "Money demand amid financial sector developments in Malaysia," Applied Economics, Taylor & Francis Journals, vol. 29(9), pages 1201-1215.
  2. Mansor H. Ibrahim, 2005. "Sectoral Effects of Monetary Policy: Evidence from Malaysia," Asian Economic Journal, East Asian Economic Association, vol. 19(1), pages 83-102, 03.
  3. Garretsen, Harry & Swank, Job, 1998. "The Transmission of Interest Rate Changes and the Role of Bank Balance Sheets: A VAR-Analysis for the Netherlands," Journal of Macroeconomics, Elsevier, vol. 20(2), pages 325-339, April.
  4. Hallsten, Kerstin, 1998. "Bank Loans and the Transmission Mechanism of Monetary Policy," Working Paper Series 73, Sveriges Riksbank (Central Bank of Sweden).
  5. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring monetary policy," Working Papers in Applied Economic Theory 95-09, Federal Reserve Bank of San Francisco.
  6. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
  7. Hsiao Chink Tang, 2006. "The Relative Importance Of Monetary Policy Transmission Channels In Malaysia," CAMA Working Papers 2006-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  8. repec:fth:inseep:9645 is not listed on IDEAS
  9. Charles S. Morris & Gordon H. Sellon, Jr., 1995. "Bank lending and monetary policy: evidence on a credit channel," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 59-75.
  10. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  11. Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series 93-5, Board of Governors of the Federal Reserve System (U.S.).
  12. Robert Neil McCauley, 2006. "Understanding monetary policy in Malaysia and Thailand: objectives, instruments and independence," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in Asia: approaches and implementation, volume 31, pages 172-198 Bank for International Settlements.
  13. Domac, Ilker & Ferri, Giovanni, 1998. "The real impact of financial shocks : evidence from the Republic of Korea," Policy Research Working Paper Series 2010, The World Bank.
  14. Friedman, Benjamin M, 1984. "Lessons from the 1979-82 Monetary Policy Experiment," American Economic Review, American Economic Association, vol. 74(2), pages 382-87, May.
  15. Scholnick, Barry, 1996. "Asymmetric adjustment of commercial bank interest rates: evidence from Malaysia and Singapore," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 485-496, June.
  16. Guender, Alfred V, 1998. "Is There a Bank-Lending Channel of Monetary Policy in New Zealand?," The Economic Record, The Economic Society of Australia, vol. 74(226), pages 243-65, September.
  17. Benjamin M. Friedman, 1984. "Lessons from the 1979-1982 Monetary Policy Experiment," NBER Working Papers 1272, National Bureau of Economic Research, Inc.
  18. Friedman, Milton, 1984. "Lessons from the 1979-82 Monetary Policy Experiment," American Economic Review, American Economic Association, vol. 74(2), pages 397-400, May.
  19. Mohsen Bahmani-Oskooee & Raymond Chi Wing Ng, 2002. "Long-Run Demand for Money in Hong Kong: An Application of the ARDL Model," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 1(2), pages 147-155, August.
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Cited by:
  1. Etem Hakan, Ergeç & Bengül Gülümser, Arslan, 2011. "Impact of Interest Rates on Islamic and Conventional Banks: The Case of Turkey," MPRA Paper 29848, University Library of Munich, Germany.

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