STATE BANK OF PAKISTAN Bank Lending and Monetary Shocks: Evidence from a Developing Economy SBP Working Paper Series SBP Working Paper Series (original) (raw)
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The transmission mechanism of monetary policy is explained through the relationships between a change in money supply and the level of real income. Monetary policy transmits to the real sector through several different channels. Such channels include the interest rate channel, the exchange rate channel, the asset-pricing channel, the credit supply channel, and the bank balance sheet channel. This paper empirically investigates the credit supply channel of monetary policy and explores the differential impact of monetary policy on credit supply of Islamic banks in Pakistan versus Malaysia. The robust two-step System-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 credit supply channel in the baseline models for both countries and differential impact of monetary policy through Islamic banks in Pakistan versus Malaysia in the extended models. Our findings suggest that there is a vital need to consider the nature of Islamic banks while devising the instruments of an effective monetary policy in countries with dual banking system like Pakistan, Malaysia, Indonesia, Bahrain, Saudi Arabia, Qatar and others.
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...
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,