The Transmission Mechanism of Monetary Policy via Bank’ Balance Sheet: An Empirical Study of Dual Banking System in Pakistan

Anis Kabir (), Syed Muhammad Abdul Rehman Shah (), M. Kabir Hassan and Muhammad Akmal ()
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Anis Kabir: Department of Economics Pakistan Institute of Development Economics (PIDE) P.O.Box 1091 Islamabad, PAKISTAN.
Syed Muhammad Abdul Rehman Shah: Department of Basic Sciences & Humanities University of Engineering and Technology (UET) P.O.Box 47050 Taxila, PAKISTAN.
Muhammad Akmal: MCB Islamic Bank Limited P.O.Box 12023 Sheikhupura Road Shahdara, Lahore, PAKISTAN.

Jurnal Ekonomi Malaysia, 2022, vol. 56, issue 2, 129-140

Abstract: 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.

Keywords: Islamic banks; balance sheet channel; conventional banks; monetary policy; monetary policy transmission mechanism. (search for similar items in EconPapers)
JEL-codes: E42 E44 E52 G21 O16 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:ukm:jlekon:v:56:y:2022:i:2:p:129-140

DOI: 10.17576/JEM-2022-5602-09

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