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The Transmission Mechanism of Monetary Policy via Bank’ Balance Sheet: An Empirical Study of Dual Banking System in Pakistan

Author

Listed:
  • Kabir, Anis

    (Department of Economics Pakistan Institute of Development Economics (PIDE) P.O.Box 1091 Islamabad, PAKISTAN.)

  • Abdul Rehman Shah, Syed Muhammad

    (Department of Basic Sciences & Humanities University of Engineering and Technology (UET) P.O.Box 47050 Taxila, PAKISTAN.)

  • Hassan, M. Kabir

    (Department of Economics and Finance University of New Orleans P.O.Box 3665, UNITED STATES.)

  • Akmal, Muhammad

    (MCB Islamic Bank Limited P.O.Box 12023 Sheikhupura Road Shahdara, Lahore, PAKISTAN.)

Abstract

This study empirically analyzes the MPTM through bank’ balance sheet in Pakistan for the period of 2008-2018. The data set consists of 22 conventional banks and 18 Islamic banks (5 full-fledged and 13 Islamic windows of conventional banks) of Pakistan. The study employs the robust two-step system-Generalized Method of Moments is applied for estimation and confirms the presence of balance sheet channel in Pakistan. The study also finds that responses of Islamic banking operations to monetary policy shocks are not different from their conventional peers because both banking systems use Karachi Interbank offered rate (KIBOR) as a benchmark for their products. The results also highlight the sensitivity of banking operations (conventional vs Islamic) to monetary policy shocks are quite different, mainly due to the difference in their nature of contracts. This study is equally beneficial for academicians and practitioners to consider the nature of both banking systems in same economy. Our findings indicate that, policy makers need to consider the nature of both banking system (conventional vs Islamic) to maintain deposits and credit supply in an economy.

Suggested Citation

  • Kabir, Anis & Abdul Rehman Shah, Syed Muhammad & Hassan, M. Kabir & Akmal, Muhammad, 2022. "The Transmission Mechanism of Monetary Policy via Bank’ Balance Sheet: An Empirical Study of Dual Banking System in Pakistan," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(2), pages 129-140.
    • Handle: RePEc:ukm:jlekon:v:56:y:2022:i:2:p:129-140
    DOI: http://dx.doi.org/10.17576/JEM-2022-5602-09
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    More about this item

    Keywords

    Islamic banks; balance sheet channel; conventional banks; monetary policy; monetary policy transmission mechanism.;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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