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The Islamic Inter bank Money Market and a Dual Banking System : The Malaysian Experience

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  • Bacha, Obiyathulla I.

Abstract

This paper examines the operation of an Islamic Interbank Money market (IIMM), within a dual banking system. The paper argues that even though an Islamic Money market operates in an interest free environment and trades shariah compliant instruments, many of the risks associated with conventional money markets, including interest rate risk is relevant to an Islamic Money Market operating within a dual banking system. The empirical evidence based on Malaysian data, points to Islamic money market profit rates/yields that are highly correlated and move in sync with conventional money market rates. Given the dynamics of fund flows and cross linkages, an IIMM operating within a dual banking system cannot sterilize itself from interest rate risk. In fact, the paper argues that such an IIMM may actually enhance interest rate risk transmission to the Islamic banking sector, by providing additional channels of transmission. Ironical as it may be, the operations of an IIMM in a dual banking system may serve to bring the Islamic banking sector into closer orbit with the conventional sector.

Suggested Citation

  • Bacha, Obiyathulla I., 2008. "The Islamic Inter bank Money Market and a Dual Banking System : The Malaysian Experience," MPRA Paper 12699, University Library of Munich, Germany, revised Mar 2008.
    • Handle: RePEc:pra:mprapa:12699
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    References listed on IDEAS

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    1. Bacha, Obiyathulla I., 2004. "Dual Banking Systems and Interest Rate Risk for Islamic Banks," MPRA Paper 12763, University Library of Munich, Germany, revised Mar 2004.
    2. Kohn, Meir, 2003. "Financial Institutions and Markets," OUP Catalogue, Oxford University Press, edition 2, number 9780195134728.
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    Cited by:

    1. Uddin, Md Akther & Halim, Asyraf, 2015. "Islamic monetary policy: Is there an alternative of interest rate?," MPRA Paper 67697, University Library of Munich, Germany, revised 07 Jun 2015.
    2. Mohd Amin, Syajarul Imna & Mohd, Shamsher Mohamad Ramadili & Mohd. Rasid, Mohamed Eskandar Shah, 2017. "Does Cost Efficiency Affect Liquidity Risk in Banking? Evidence from Selected OIC Countries," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 51(2), pages 47-62.
    3. CHATTI, Mohamed Ali & KABLAN, Sandrine & YOUSFI, Ouidad, 2010. "Activity diversification and performance of Islamic banks in Malaysia," MPRA Paper 28348, University Library of Munich, Germany.
    4. Faisal Alqahtani, 2018. "Economy Downturn, Islamic Banking and the Indirect Consequences of the Global Financial Crisis," Review of Economics & Finance, Better Advances Press, Canada, vol. 12, pages 72-87, May.
    5. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    6. Alamsyah, Janoearto & Masih, Mansur, 2017. "Impact of islamic money market development on islamic bank liquidity management: a case study of Indonesia," MPRA Paper 106778, University Library of Munich, Germany.
    7. Ndiaye, Ndeye Djiba & Masih, Mansur, 2017. "Is inflation targeting the proper monetary policy regime in a dual banking system? new evidence from ARDL bounds test," MPRA Paper 79420, University Library of Munich, Germany.
    8. Seho, Mirzet & Alaaabed, Alaa & Masih, Mansur, 2016. "Risk-Sharing Financing of Islamic Banks: Better Shielded Against Interest Rate Risk?," MPRA Paper 82558, University Library of Munich, Germany.
    9. Kahf, Monzer & Hamadi, Cherin, 2014. "An Attempt to Develop Sharīʿah Compliant Liquidity Management Instruments for the Financier of Last Resort: With Reference to Qatar Development Plan," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 22, pages 109-138.
    10. Sarker, Md. Abdul Awwal, 2015. "Islamic Monetary Policy Instruments (IMPIs)," Working Papers 1436-4, The Islamic Research and Teaching Institute (IRTI).
    11. Uddin, Md Akther & Ali, Md Hakim & Radwan, Maha, 2019. "Can GDP Growth Linked Instrument Be Used For Islamic Monetary Policy?," MPRA Paper 102888, University Library of Munich, Germany.
    12. Nechi, Salem & Smaoui, Houcem Eddine, 2019. "Interbank offered rates in Islamic countries: Is the Islamic benchmark different from the conventional benchmarks?," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 75-84.

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    More about this item

    Keywords

    Islamic Interbank Money Market; Dual Banking; Malaysia;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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