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The bank lending channel in the Malaysian Islamic and conventional banking system

Guglielmo Maria Caporale, Abdurrahman Nazif Çatık, Mohamad Husam Helmi, Faek Menla Ali and Mohammad Tajik

Global Finance Journal, 2020, vol. 45, issue C

Abstract: This paper examines the bank lending channel of monetary transmission in Malaysia, a country with a dual banking system including both Islamic and conventional banks, over the period 1994: 01-2015:06. A two-regime threshold vector autoregression (TVAR) model is estimated to take into account possible nonlinearities in the relationship between bank lending and monetary policy under different economic conditions. The results indicate that Islamic credit is less responsive than conventional credit to interest rate shocks in both the high and low growth regimes; however, the sub-sample estimation shows that its response has increased in more recent years becoming quite similar to that of conventional credit. Moreover, the relative importance of Islamic credit shocks in driving output growth is notable in the low growth regime, their effects being positive. These findings can be interpreted in terms of the distinctive features of Islamic banks.

Keywords: Bank lending channel; Malaysia; Monetary transmission; Islamic finance; Threshold VAR (search for similar items in EconPapers)
JEL-codes: C32 E31 E42 E58 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.gfj.2019.100478

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