Islamic banks and monetary transmission mechanism in Malaysia
Abstract and Figures
Monetary policy influences the real economy through various channels including the bank lending. Currently, Malaysia is operating under dual banking systems; conventional and Islamic banking. The latter has distinctive feature of interest-free. Hence, this study aims to empirically explore the relevance of Islamic banks' financing in channeling the monetary policy effects to the real economy. To achieve this objective, the study relies on an autoregressive distributed lag (ARDL) bound testing approach and innovation accounting approach, and uses quarterly data spanning from 1991:Q1 to 2010:Q4. The study documents that Islamic financing channel for monetary transmission exists in Malaysia. Islamic financing is unequally distributed to economic sectors in response to monetary policy shock. Furthermore, the findings also reflect that Islamic banking as operating in dual banking system is not spared from the interest rate and monetary conditions of the country. This clearly shows the behavior of Islamic banking which cannot shun away from the interest rate while its operation delinks from the interest rates. In designing monetary policy, the central bank should consider Islamic financing as an alternative or complement channel for monetary transmission since this channel is just as active as conventional lending channel.
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... of monetary policy (Kashyab and Stein, 1994;Sharpe, 1995;Hasin and Majid, 2012;Shah and Rashid, 2019). Several studies such as, Bernanke and Blinder (1995), Gertler and Gilchrist (1993), Kashyab and Stein (1995), have noted the differential impact of monetary policy on banks' credit supply across small and large banks. ...
... " Alper, Hulagu and Keles (2012) have concluded that the negative coefficient suggests that small banks lend more under tight monetary policy. These empirical results are consistent with the centric view of monetary policy (Kashyab and Stein, 1994;Sharpe, 1995;Hasin and Majid, 2012). Moreover, the large banks are found able to absorb the effects of tightening monetary policy, whereas the small banks that are affected more due to monetary policy actions. ...
... The non-existence of interest rate system did not disrupt the Islamic banking world because there were other instruments existed such as: profit loss sharing, margin, and fee for every product in Islamic banking system [8], [9]. Since interest rate was considered as Riba (haram/forbidden) thus could not be considered to be opted in the monetary transmission mechanism [10], [11]. Profit loss sharing system was considered more justifiable than interest rate system, in term of risk. ...
The purpose of this study is to investigate the interrelationship between Bank Indonesia 7 Days Reverse Repo Rate (BI 7 DRRR) and Profit-Loss Sharing Rate (Nisbah Rate) in Islamic Sharia Banks (Bank Syariah Indonesia). Indonesia had been establishing conventional monetary system ever since and have yet to introduce Islamic approach to its monetary system. Now, in Islamic monetary perspective, interest rate doesn’t exist. Therefore, this research aimed to discover the possibility of Islamic approach in Indonesia’s monetary system, using Nisbah Rate launched by Islamic Sharia Banks as a substitution. The research was conducted using VAR (Vector Autoregression) to study the interrelationship between BI 7 Days Reverse Repo Rate and Nisbah Rate, using data obtained from Islamic Banking Statistics through Indonesia’s Financial Service Authority (OJK) monthly during 2021-2023. The result showed that both BI 7 Days Reverse Repo Rate and Nisbah Rate did cause impact on one another, and thus the possibility of establishing Islamic monetary system is not completely disregarded. This investigation contributes to the ongoing discourse surrounding the integration of Islamic financial principles into conventional monetary frameworks. By highlighting the reciprocal influence between conventional monetary policies and Islamic financial instruments, this study underscores the potential for a hybrid monetary system that accommodates Islamic principles within the Indonesian financial landscape.
... It is the differentiation among ijarah and IMBT (Majid & Hasin, 2014). Furthermore, this is likewise expected to show that the client definitely realizes that Islamic banks have bought houses from engineers. ...
The Islamic banking industry in Indonesia continues to experience significant development. With this development, innovation in products and services in Islamic banking is very important to answer the needs in contemporary banking and financial transactions. One of the many products that have been applied and developed is ijarah. However, practitioners and scholars are still discussing different points of view regarding the legal basis of ijarah and its types. This research aims to review the development process of the ijarah principle and its variance from the early Islamic period to the present. This study is a qualitative research with a literature study approach and library research with descriptive analysis. This research concludes that, The concept of ijarah has existed since the time of the apostle of Allah, namely with the wage system given by the Rasulullah for the services received. For its application in the industry, there are 2 main products, namely Ijarah Muntahiya Bittamlik (IMBT) and Ijarah Maushufah Fi Al Dzimmah (IMDF).
... The results showed that the fourth hypothesis was not rejected, namely that there was an effect of service quality on loyalty through homology moderation. According to stakeholder theory, the success of an Islamic banking institution is highly dependent on its ability to balance the needs of various stakeholders [22] and serve its customers by observing Islamic values [23][24][25][26][27]. ...
This study aims to measure and analyze the
moderating role of bank reputation on the effects of
service quality and sharia governance on loyalty of the
customers of Bank Syariah Indonesia (BSI) in Banda
Aceh City, Indonesia. Of the 39,872 BSI customers, 125 of
them were selected as the sample of the study using a
purposive sampling technique. Primary data collection was
carried out by distributing questionnaires to respondents
and analyzed using the Structural Equation Modeling
(SEM) technique. The results of the study revealed that
sharia governance and service quality have a significant
positive effect on customer loyalty. The bank reputation
has a significant moderated role in enhancing the effects
on sharia governance and service quality on customer
loyalty. These empirical results showed the importance of
improving the quality of service and sharia governance in
increasing customer loyalty would be enhanced by
continuous improvements of bank reputation.
... One way to get prosperity is by investing. Muslims should invest their monies in line with sharia principles, which are free from the elements of gharar (uncertainty), riba (usury) and masyir (gambling) [1]. The equity market integration has an inclination to progress together and encompassstable long-run equilibrium [2]. ...
This study intends to empirically explore and
analyse the effects of financial literacy and digital technology
on investing intention in the Islamic capital market among
Generation Z (Gen Z) in Banda Aceh City, Indonesia. It also
attempts to assess how risk tolerance affects investment
intentions in a mediating way. Out of 37,892 Gen Z in the city,
125 of them made up the study's sample, selected using the
purposive sampling technique. The study collected the
primary data by sending questionnaires to the selected
respondents and assessed using the Structural Equation
Modeling (SEM) approach. The study recorded that the Gen
Z interest in investing in the Islamic capital market and risk
tolerance were positively impacted by financial literacy and
digital technology. The study also discovered that the impact
of financial literacy and digital technology on investing
intentions is mediated by risk tolerance. These findings
highlight the crucial role of enhancing financial literacy and
advancing digital technology in boosting Gen Z's risk
tolerance and stimulate their interest in investing monies in
the Islamic capital market.
... Thirdly, the findings of the abnormal return analysis conducted on Sharia-compliant and conventional stocks subsequent to the announcement of dividends unveil a notable contrast in abnormal returns between the two categories of stocks after the dividend announcement. The different nature and characteristics of Islamic stocks that are practices in harmony with Islamic values, which are free from riba (interest)-, gharar (uncertainty), and maysir (gambling) elements [17][18][19] and its trading are backed up by real assets [20][21] might contribute to different responses of Islamic stocks as compared to their conventional counterparts to the dividend announcements. Thus, identifying different nature of responses of the stock markets to the economic, social, technological, environment, and political events could help investors to predict the movements of stock returns, thus they might grasp investment benefits diversification. ...
This research is an event study, aiming at
observing the stock markets’ reaction to dividend
announcements using the abnormal return indicator. This
study covers a four-year period, from 2019 to 2022. The event
window is set as three-day before and three-day after the
dividend announcement. A number of 50 companies were
selected as the sample of the study consists of each 25 Islamic
stocks and 25 conventional stocks. The research employs a
documentation method, primarily sourcing data from the
official website of the Indonesia Stock Exchange, by collecting
daily closing stock prices during the observation period. The
study’s findings revealed the presence of abnormal return
differences both before and after the dividend announcement,
for both Shariah-compliant and conventional company stocks.
The findings further signify that the different stock market
reactions as indicated by the differences in the abnormal
returns to the dividend announcements.
The development and competitiveness of Islamic banking, as a relatively young segment of the global financial market, is conditioned, first of all, by the trust of current and potential investors in the ability of Islamic banks to manage entrusted funds by the contract and good business practice. Deposit insurance is one of the important instruments that can be used to strengthen depositors' confidence in the banking system's stability. This paper analyzes the model of Islamic deposit insurance. The paper's objectives are to review its theoretical basis and the features of its practice, possible deviations of business practice from theoretical postulates, and the challenges of applying Islamic deposit insurance in different legal systems. Analyzing the practice of Islamic deposit insurance, it concludes that in most countries it deviates from the Shariah-compliant model of deposit insurance. This was primarily contributed by banking regulations that generally do not recognize the specificity of an Islamic bank's relationship with its depositors and, therefore, the Islamic banks' need for an authentic approach to deposit insurance.
The objective of this research is to explore and
analyze the moderating role of sharia financial literacy in
enhancing the relationship between perceived convenience,
perceived benefits, and perceived security on the desire to use
sharia financial technology (fintech) services among Gen Z in
Banda Aceh City, Indonesia. From a total of 37,892 Gen Z
individuals in the city, 150 respondents were selected as the
research sample using a purposive sampling technique. The
primary data were collected by distributing the questionnaires
to the respondents and analyzed using the Moderated
Regression Analysis (MRA) method with the support of SEMPLS software. The study recorded that perceived convenience,
perceived benefits, and perceived security have a positive
impact on interest in using sharia fintech services. The study
found an insignificant role of the sharia financial literacy in
moderating the effects of perceived convenience, perceived
benefits, and perceived security on interest in using sharia
fintech services among Gen Z in Banda Aceh City. However,
sharia financial literacy positively influenced interest of using
sharia fintech services. Thus, to increase interest of Gen Z in
using sharia fintech services, it is important to increase sharia
financial literacy, perceived convenience, perceived benefits,
and perceived security among Gen Z.
Conventional interest-based monetary policy has yet to be effective in overcoming monetary problems. So, this article is to discuss how to apply qard al hasan as one of the sharia monetary instruments in Indonesia. The method used is literature study. The results of the analysis and discussion show that Qard al Hasan's Monetary Policy can be implemented in Indonesia. This is because Qard al Hasan is very in accordance with the Qur'an and Hadith and the implementation of Qard al Hasan-based monetary policy can not only stabilize prices and inflation, but also can increase national production or GDP and reduce the number of poor people. Bank Indonesia as the executor of Monetary Policy can apply the Qard al Hasan system, because Bank Indonesia has started to create a database of community groups that have Micro, Small and Medium Enterprises, so that the implementation of Qard al Hasan in Indonesia can be implemented.
Purpose
This study aims to review to what extent Islamic banks carry conventional monetary policy impulses. Hence, the authors focus to review on the presence or absence of an Islamic financing channel.
Design/methodology/approach
A systematic approach to the literature review was adopted. The search criterion is confined to empirical studies that examined the transmission of interest-based monetary policy through Islamic banks’ financing, particularly empirical studies that check the existence of an Islamic bank financing channel of conventional monetary policy. By adopting a systematic approach, over 40 empirical papers published in Scopus and Google Scholar were selected for review and analysis to suggest prospects for future analysis in this field.
Findings
The existence of Islamic banks may raise concerns for local central banks, particularly in terms of implementing monetary policies that rely on interest rates. Indeed, the specific nature of the business model of Islamic banks based on the sharing of losses and profits as an alternative to interest rate–based remuneration suggests a priori the non-transmission of monetary policy through these free-interest banks. Despite this, the actual asset structure of Islamic banks may facilitate the transmission of monetary impulses to the economy. Currently, there are limited and inconclusive empirical studies on how Islamic bank financing contributes to the transmission of monetary policy. Additional research is required to fully comprehend the response of Islamic banks to fluctuations in monetary policy interest rates, as well as the factors that impact their reactions.
Originality/value
This literature review is incredibly important as it thoroughly examines a critical issue from both academic and practical perspectives. Analyzing how monetary policy actions can be transmitted through Islamic bank financing is an important task that can provide insights for future research. A straightforward response to this inquiry could assist central banks in formulating effective monetary policy.
This paper tries to analyse the role of Islamic banks in the transmission of monetary policy and business cycle. This study will only analyse the Islamic banking in Malaysia. The changes in the monetary policy channel give an idea to regulate and strengthen the banking industry. Thus, several questions can be highlighted: how do the changes in the monetary policy tools affect the bank lending? If bank lending plays as monetary policy channel, do they affect the other portfolio? Do the current regulations (such as capital requirement) af-fect the Islamic bank lending? Furthermore, Generalize Least Squares approach will be us-ing to estimate the monetary changes towards Islamic banks portfolio. Annual data will be used from the year 1997 until 2004. The number of observations is based on the combination of time series and cross-sectional data, which is known as pooled data. Instead of that, we will use an unbalanced bank-level panel data set for Islamic banks (i.e., two full-pledged Islamic banks and thirteen Islamic windows).
JEL Classification numbers: E51, E52, E58
Keywords: Transmission Mechanism; Monetary Policy; Lending Channel
This study analyzes the impact of monetary policy shocks on the conventional and Islamic banks in a dual banking system environment. The responses of the conventional banks to monetary policy shocks is expected to be different from that of the Islamic banks due to the nature of the Islamic ones which only involve with interest-free instruments. Focusing on the Malaysian data covering the period from January 1999 to December 2006, the study aims at determining the sensitivity of the Islamic banks by analyzing the impact of interest rate changes on the banks' financing and deposits. To provide meaningful comparison, the same analysis is also conducted on the conventional banks so as to determine the unique risks confronting the Islamic banks. The study employs the impulse response functions and variance decomposition analysis based on the Vector Auto-Regression (VAR) methodology. Contrary to the general expectations, the results show that the Islamic banks' balance sheet items are relatively more sensitive to monetary policy changes, while the conventional banks' balance sheet items, particularly the conventional loans are insensitive to interest rate changes. This implies that the impact of monetary policy is more de- stabilizing on the Islamic banks than the conventional banks. The results of this study have important implications for the risk management
Let n observations Y 1, Y 2, ···, Y n be generated by the model Y t = pY t−1 + e t , where Y 0 is a fixed constant and {e t } t-1 n is a sequence of independent normal random variables with mean 0 and variance σ2. Properties of the regression estimator of p are obtained under the assumption that p = ±1. Representations for the limit distributions of the estimator of p and of the regression t test are derived. The estimator of p and the regression t test furnish methods of testing the hypothesis that p = 1.
We study the monetary-transmission mechanism with a data set that includes quarterly observations of every insured U.S. commercial bank from 1976 to 1993. We find that the impact of monetary policy on lending is stronger for banks with less liquid balance sheets - i.e., banks with lower ratios of securities to assets. Moreover, this pattern is largely attributable to the smaller banks, those in the bottom 95 percent of the size distribution. Our results support the existence of a "bank lending channel" of monetary transmission, though they do not allow us to make precise statements about its quantitative importance.
This paper attempts to prove the role of asset size and capital strength to the monetary shock on bank lending channel in Malaysia. Basically, undercapitalized banks (of any size) tend to respond more to change in policy rather than well capitalized. Besides that, some smaller banks hold less liquid assets which they can't use to offset monetary shock. However, most of large banks easily shield their operation from the monetary stance. Therefore, by using panel data of 25 commercial banks in Malaysia from 1997 to 2004 this paper tries to prove whether both variables play an important role in the monetary shock on the bank lending channel. We assume that asset size and capital ratio as controlled variables that have been included in the model. Generalize Least Squares method on the Fixed Effects has been chosen as the estimation method. The findings show that there exists a bank lending channel in Malaysia. Unfortunately, we failed to prove the size of asset and capital ratio play important role to the changes in monetary policy.