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Monetary Policy Pass-through, Excess Liquidity and Price Spillover: A Comparative Study of Conventional and Islamic Banks of Pakistan

Muhammad Omer

No 100, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: This study investigates the comparative pass-through of policy rate to the retail prices, spillover of prices between Islamic and conventional banking systems, and the impact of excess liquidity on these pass-throughs using data from interbank market of Pakistan. The results suggest that the monetary policy shock affect retail prices of Islamic banks similar to conventional banks, confirming the findings of earlier studies. Moreover, there is a strong spillover between the prices of two systems; Islamic banks are following (leading) the conventional banks in pricing the lending (deposit) products. Islamic bank have acquired advantage in the deposit pricing by taping the religious depositors, which also has promoted financial inclusion in the economy. Our results suggest that the presence of excess liquidity have no effect on pass-through of policy rate in the Islamic system, which is contrary to the prevalent notion. However, excess liquidity significantly affects the spillovers of prices between the systems. These results support the hypothesis that the Islamic banks are investing in government securities indirectly via conventional banks.

Keywords: Excess Liquidity; Islamic Banks; Monetary Policy Pass-through; VECM; Mediation (search for similar items in EconPapers)
JEL-codes: C43 E31 F41 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2018-10
New Economics Papers: this item is included in nep-cba, nep-fle, nep-isf, nep-mac and nep-mon
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