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Financial Stability: The Significance and Distinctiveness of Islamic Banking in Malaysia

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  • Ewa Karwowski

Abstract

This paper explores the significance of Islamic banking in Malaysia for stability in the country's economy as a whole. Neither conventional theory nor Islamic economics puts forward a systematic explanation of financial intermediation; consequently, neither is capable of identifying destabilizing elements in the system. Instead, a flow-of-funds approach similar to Minsky's own is applied to the (post-) modern (consumption-led) business cycle and financial (and asset) market. Malaysia's structural current account surplus contributes to the overcapitalization of domestic firms. This in turn finances a financial (as opposed to an industrial), consumption-led (instead of investment-led) business cycle, where banking favors destabilizing asset price inflation. Islamic banks operating interdependently with conventional ones contribute to economic destabilization, channelling surplus funds from the corporate to the household sector.

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  • Ewa Karwowski, 2009. "Financial Stability: The Significance and Distinctiveness of Islamic Banking in Malaysia," Economics Working Paper Archive wp_555, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_555
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