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The Islamic Inter bank Money Market and a Dual Banking System: The Malaysian Experience

Obiyathulla Bacha

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the operation of an Islamic Interbank Money market (IIMM), within a dual banking system. The paper argues that even though an Islamic Money market operates in an interest free environment and trades shariah compliant instruments, many of the risks associated with conventional money markets, including interest rate risk is relevant to an Islamic Money Market operating within a dual banking system. The empirical evidence based on Malaysian data, points to Islamic money market profit rates/yields that are highly correlated and move in sync with conventional money market rates. Given the dynamics of fund flows and cross linkages, an IIMM operating within a dual banking system cannot sterilize itself from interest rate risk. In fact, the paper argues that such an IIMM may actually enhance interest rate risk transmission to the Islamic banking sector, by providing additional channels of transmission. Ironical as it may be, the operations of an IIMM in a dual banking system may serve to bring the Islamic banking sector into closer orbit with the conventional sector.

Keywords: Islamic Interbank Money Market; Dual Banking; Malaysia (search for similar items in EconPapers)
JEL-codes: D02 D53 E44 (search for similar items in EconPapers)
Date: 2008, Revised 2008-03
New Economics Papers: this item is included in nep-ara, nep-ban, nep-mac, nep-mon and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published in International Journal of Islamic and Middle Eastern Finance and Management 3.1(2008): pp. 210-226

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