The Islamic Inter bank Money Market and a Dual Banking System : The Malaysian Experience
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.
|Date of creation:||2008|
|Date of revision:||Mar 2008|
|Publication status:||Published in International Journal of Islamic and Middle Eastern Finance and Management 3.1(2008): pp. 210-226|
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- 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.
- Kohn, Meir, 2003. "Financial Institutions and Markets," OUP Catalogue, Oxford University Press, edition 2, number 9780195134728, March.
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