Evaluating the efficacy of monetary policy transmission channels in the context of Islamic financial intermediation: a quantitative examination utilising high-granularity datasets in the Malaysian dual banking system

Research output: Contribution to conferenceAbstract


The growing significance of the ‘non-interest’ approach of Islamic banking and finance raises questions about its impact on the monetary transmission mechanism and, consequently, the effectiveness of monetary policy. This research aims to investigate the implications of Islamic banking for the monetary transmission mechanism, specifically examining how shocks in the overnight interbank money market rate affect output and inflation. Malaysia serves as THE context for this study due to its distinctive dual banking system, where both conventional and Islamic banking institutions operate concurrently.

This research employs econometric methods including Vector Autoregression (VAR), Cointegration Analysis, Error Correction Model (ECM), impulse response analyses, and Granger causality tests. It aims to reveal differences in the timing, magnitude, and direction of these impacts compared to conventional (interest-based) banking systems. First, it examines the short-term and long-term impact of monetary policy shocks on output and inflation in both sectors. Second, it analyses the interest rate pass-through mechanism in Islamic banking in Malaysia, with a particular focus on the Islamic Interbank Money Market (IBMM) rate. The comparative analysis extends to its conventional counterpart, investigating the extent to which retail bank rates respond to changes in interbank rates.

Preliminary results from a sample of daily data spanning from 1997 to 2022 indicate that the conventional banking sector experiences a more immediate, though not necessarily larger, response to monetary policy shocks in terms of interest rates and credit availability. In contrast, the Islamic sector exhibits a quicker but generally smaller adjustment in its pass-through mechanism.

The findings offer important considerations for monetary policy formulation, suggesting that policy impact may vary between the conventional and Islamic banking sectors. Consequently, these results highlight the need for policymakers to consider these differences when designing and implementing monetary policy in an increasingly complex and diverse financial landscape.
Original languageEnglish
Number of pages1
Publication statusPublished - 6 Dec 2023
EventConference of the Asian Regional Section of the International Association for Statistical Computing 2023 - Macquarie University, Sydney, Australia
Duration: 6 Dec 20238 Dec 2023
Conference number: 12th


ConferenceConference of the Asian Regional Section of the International Association for Statistical Computing 2023
Abbreviated titleIASC-ARS 2023

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