The Impact of Monetary Policy on Lending and Deposit Rates in Pakistan: Panel Data Analysis (original) (raw)
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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...
Impact of Monetary Policy on Bank' Balance Sheet in Pakistan
This study empirically investigates the centric view of monetary policy. The study is carried out for Pakistan using annual data covering the period from 2006 to 2012. Fixed effects estimator is applied to investigate the impact of monetary policy measures on banks' loan supply. We find significant evidence on the existence of the negative relationship between monetary measures and bank loan supply. We also provide empirical evidence that monetary tightening puts more burdens on small banks as compared to large banks. Yet, we observe that during monetary tightening, aggregate lending by all the banks decreases, which consequently decreases the level of investment that affects the growth and output level of the economy. Evidence on monetary transmission is useful for developing the link between the financial and real sector of the economy. This study helps the policy makers to find different channels through which they can increase the effectiveness of monetary policy.
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.
Monetary Policy and Bank Hetrogeneity: Effectiveness of Bank Lending Channel in Pakistan
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We investigate, using vector autoregressions (VAR) and Panel Data Analysis, the role of banks in monetary policy transmission in Pakistan. Empirical evidence suggests that the 'bank lending channel' is at work at the aggregate level. Loans, deposits and government securities all reduce after a shock to the monetary policy. When we examine bank heterogeneity in terms of size, liquidity and capitalization, the results are mixed. Size is found to be a relevant characteristic. Capitalization, measured by excess capital, is also somewhat effective. Thus, small sized and capital constrained banks respond more to monetary policy signals. Liquidity and the traditional measure of capital, on the other hand, are found to be weaker characteristics. Moreover, the results suggest that the market for loans has a stationary size distribution (no monopolistic tendencies) in Pakistan.
The Role of Bank Loans and Deposits in the Monetary Transmission Mechanism of Pakistan
SSRN Electronic Journal, 2012
This study is an attempt to examine the impact of bank lending channel in the monetary transmission mechanism of Pakistan, Analyzing five-year monthly data with the use of cointegration test, Vector Error Correction Model and Variance Decomposition Analysis. This study concludes that the bank loans and deposits are unable to play their role significantly in the monetary transmission mechanism of Pakistan. Further this study provides evidence in favor of macroeconomic variables in playing important role in the conduct of monetary transmission mechanism.
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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,
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The Taylor rule (1993) focuses only on two objectives: output and inflation. In practice, the central bank's loss function (especially in developing countries) contains objectives other than these two, like the interest rate smoothing, exchange rate stabilisation, etc. In this study, the monetary policy reaction function has been estimated, including five objectives for monetary policy as well as controlling for the effect of three other factors. Whereas the results confirm the counter-cyclical response of monetary policy to the factors in the loss function, the response of interest rate to changes in the foreign exchange reserves and the government borrowing has been negative. Variance decomposition shows that most of the variation in the interest rate is explained by its own lagged values. Other variables, in explaining variation in the interest rate, can be ranked as inflation, government borrowing, exchange rate, output gap, trade deficit, and, finally, the foreign exchange reserves.
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...
Asian Journal of Economic Modelling, 2019
The lending and asset price transmission channels remain largely unexplored since financial reforms and pursuance of market-based monetary policy instruments. This paper examines the monetary policy transmission mechanisms of Pakistan with a special focus on bank lending and asset price channels. Monthly data over the period 2000M7-2016M12 is being used for the short run analysis. The empirical investigation is based on SVAR framework. The results show that the monetary aggregates targeting agenda is still operative in effecting the output and general price level. Bank lending have a non-trivial part through the investment channel and share prices through wealth effect on price level and output, while the conventional interest rate channel seemed to be ineffective in the transmission mechanism process in Pakistan. The findings of generalized impulse response functions are backed by the generalized error forecast variance decomposition analysis. In addition to domestic variables, external shocks appear to have a strong influence on inflation and output in Pakistan. Contribution/ Originality: This study contributes in the existing literature by examining the monetary policy transmission mechanisms of Pakistan with a special focus on bank lending and asset price channels.