Effects of Monetary Policy on Stability and Asset Quality of the Banks in Pakistan
Sajjad Zaheer () and
Muhammad Arby ()
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Sajjad Zaheer: State Bank of Pakistan
No 113, SBP Working Paper Series from State Bank of Pakistan, Research Department
This study analyzes the impact of monetary policy on financial stability and asset quality of the banks in Pakistan using quarterly data of individual banks from June 2007 to June 2022 after controlling for heterogeneous bank specific characteristics and macroeconomic conditions. Moreover, the paper investigates the differences in banksâ€™ responses to monetary policy stance across bank types, i.e., conventional versus Islamic. The results show that a policy rate hike affects the stability of the conventional banking institutions negatively; however, in sharp contrast, stability of the Islamic banks is positively associated with policy rate hike. Z-score is used as stability indicator, which is based on ratios of capital to assets and return on assets. A one percentage point hike in monetary tightening reduces the Z-score by 0.10 points in case of conventional banks; and increases it by 0.10 points in case of Islamic banks. Regarding the asset quality, the non-performing loans of both the conventional and Islamic banks increase by 0.19 points with a one percentage point increase in the monetary tightening.
Keywords: Monetary Policy; Central Banking; Banks (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 (search for similar items in EconPapers)
Pages: 18 pages
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