DETERMINANTS OF BANK LIQUIDITY CREATION: A COMPARISON BETWEEN ISLAMIC BANKS AND CONVENTIONAL BANKS IN A DUAL BANKING SYSTEM

Moau Yong Toh () and Dekui Jia
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Moau Yong Toh: School of Economics and Management Xiamen University Malaysia, Jalan Sunsuria Bandar Sunsuria, Sepang, Selangor, Malaysia
Dekui Jia: ��Department of Finance, School of Economics Changzhou University, 21 Gehu Middle Road Wujin Changzhou, Jiangsu, P. R. China

The Singapore Economic Review (SER), 2023, vol. 68, issue 03, 963-999

Abstract: Using a panel dataset of 45 banks operating in Malaysia’s dual banking system over the period 2001–2017, this paper investigates whether and how the liquidity creation of Islamic banks is determined differently from that of the conventional commercial banks. The preliminary analysis shows that bank capital, size, risk and market power are significant determinants of bank liquidity creation in the dual banking system, whereas macroeconomic factors exert little influence. When banks are differentiated by bank types, the paper finds that bank capital, size and risk are related to more liquidity creation of Islamic banks vis-à -vis conventional banks, particularly in terms of on-balance sheet liquidity creation. Bank market power affects the liquidity creation by Islamic banks negatively, as opposed to the positive effect observed for conventional banks. This paper also finds that the liquidity creation pattern of Islamic banks is pro-cyclical, given that their on-balance sheet liquidity creation is more responsive to changes of economic growth and monetary policy rate. The overall results suggest that the institutional features of Islamic banking and the country’s regulatory support for the industry cause Islamic banks to respond heterogeneously from their conventional counterparts. The results offer numerous key policy implications for countries adopting dual banking systems.

Keywords: Liquidity creation; dual banking system; Islamic bank; conventional bank (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S0217590821500053

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