The Credit Supply Channel of Monetary Policy Transmission Mechanism: An Empirical investigation of Islamic Banks in Pakistan versus Malaysia (original) (raw)
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2020
This paper investigates the influence of Monetary Policy (MP) on the credit supply decisions of Islamic Banks (IBs) and Conventional Banks (CBs) of Pakistan. The empirical analysis covers the period 2005-2017. The robust two-step system-GMM results provide strong evidence that MP measures are significantly and negatively related to the credit supply in the economy, confirming the existence of the “bank credit channel” of MP in the economy. Yet, the results show that the impacts of MP on financing decisions are weak for IBs than for CBs. Our results suggest that for effective implementation of the MP, the monetary authorities should take into account the relatively slow response of IBs to MP actions. JEL Classifications: G15; G21; E52; E42,
Research in International Business and Finance, 2020
This paper empirically investigates the impact of monetary policy on the credit supply of Islamic versus conventional banks of Malaysia using an unbalanced panel dataset over the period 2005-2016. While estimating the effects of three alternative measures of monetary policy on banks' credit supply, we include several bank-specific and macroeconomic variables in the specification as control variables. We provide strong evidence on the existence of the credit channel of monetary policy transmission mechanism in Malaysia. Yet, we show that Islamic banks respond considerably less to changes in monetary policy instruments as compared to their conventional counterparts. We also find that the monetary policy measures affect small-sized banks and less-liquid banks more as compared to large-sized and more-liquid banks. Our findings suggest that for an effective monetary policy, there is a vital need to consider the nature of Islamic banking while devising any monetary policy instruments to manage credit supply in the economy.
Jurnal Ekonomi Malaysia, 2022
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.
An Empirical Investigation of Banks-Centric View of Monetary Policy from Pakistan
AITU Scientific Research Journal, 2023
The banks centric-view of monetary policy works through the response of credit supply to the indicators of monetary policy such as interest rates and other policy instruments. The importance of the banks' credit supply channel came to the forefront since the 2007 worldwide depression affected badly the stability of banking sector. Yet, we know less about the relative role of banks in monetary policy transmission mechanism, especially, these impacts are observed on the basis of size of banks. This paper therefore empirically examines the impact of monetary policy on banks' lending channel of monetary policy. The robust two-step system-the Generalize Method of Moments (GMM) estimator is applied on an unbalanced panel dataset over the period 2005-2016. While estimating the effects of three alternative measures of monetary policy on banks' credit supply, several bank-specific variables are included in the specification as control variables. We provide strong evidence on the existence of banks' lending cannel in baseline model and differential impact of monetary policy measures on small versus large banks in extended model. Our findings suggest that there is a vital need to take into account the size of banks while designing the instruments of an effective monetary to manage credit supply in the economy.
Journal of Islamic Business and Management (JIBM), 2019
An empirical examination of the Tight Monetary Policy (TMP) effects on the financing decisions of banks is of significance for an in-depth understanding of the Credit Channel of Monetary Policy (CCMP). Therefore, this paper aimed at examining the relative role of Islamic and Conventional Banks (CBs) in transmitting the effects of monetary tightening in Pakistan. It also examines whether TMP influences banks’ credit expansion differently across bank size and liquidity position. The empirical analysis consists of 11 Islamic Banks (IBs) (5 full-fledged IBs and 6 Islamic branches of CBs) and seventeen CBs with an unbalanced annual bank-level panel dataset covering the period 2005-2016. The results reveal that both types of banks significantly cut their financing in periods of TMP, confirming the existence of the credit channel. The results also indicate that TMP affected IBs less than their conventional peers. The results also provide evidence that large-sized and more-liquid Islamic as...
The Journal of Muamalat and Islamic Finance Research
In Pakistan, bank lending plays a critical role in economic activities due to the scarcity of stocks and bond options. Islamic banks face an extra layer of difficulty with limited open market instruments and lender of last resort facilities, as well as tough competition with conventional banks. This study analyzes the differences in bank lending by Islamic and conventional banks in transmitting monetary policy by modeling bank credit as a dependent variable while bank-specific assets, liquidity, capital and growth, inflation, and policy rates as explanatory variables. Polled OLS fixed effect panel data models are used to analyze annual data for 2009-2018. The study finds that Islamic bank credit is influenced significantly by policy rates, inflation, and growth, as well as capital and liquidity. Conventional bank credit is significantly affected by the policy rates, growth, and inflation but capital and liquidity are less correlated. This paper concluded that Islamic banks are signi...
The roles of domestic and foreign Islamic banks in Malaysian monetary transmission
International Journal of Islamic and Middle Eastern Finance and Management, 2014
Purpose – The aim of this paper is to empirically test the presence of the bank lending channel for the Islamic banking system in Malaysia. Design/methodology/approach – Distributional effects from monetary policy changes were analyzed by three bank characteristics such as size, liquidity and capital. Using the econometric model by Kashyap and Stein (1995), the implementation of a policy contraction leads to reduction in loan supply because some banks may not able to offset a reduction in deposits. The paper explores the response shown between domestic and foreign Islamic banks in Malaysia using bank-level data from 2005 to 2010. Findings – The empirical result indicates presence of the bank lending channel in the Islamic banking system in Malaysia, size and liquidity as sources of difference response of financing supply in domestic bank and capital for foreign Islamic bank and Islamic interbank rate as an efficient tool in conducting monetary policy especially in the Islamic bankin...