Title: Sensitivity of the Islamic and conventional banks to monetary policy changes: the case of Malaysia

Authors: Salina H. Kassim, M. Shabri Abd. Majid

Addresses: Department of Economics, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, P.O. Box 10, 50728 Kuala Lumpur, Malaysia. ' Department of Economics, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, P.O. Box 10, 50728 Kuala Lumpur, Malaysia

Abstract: This study intends to determine the impact of monetary policy changes on Islamic banks vis-a-vis conventional banks. In achieving this, the study explores the dynamic inter-relationships between deposits and loans of the Islamic and conventional banks with monetary policy variable using two major tests. First, the Auto-Regressive Distributed Lag (ARDL) model is used to examine the long-run relationship among the variables. Second, the Vector Error-Correction Model (VECM) is adopted to explore the short- and long-run dynamics between the variables. The study focuses on Malaysian data covering the period from January 1998 to December 2006. The study finds that the Islamic banks| balance sheet items are relatively more sensitive to monetary policy changes, compared to the conventional banks balance sheet items. This implies that the impact of monetary policy is more de-stabilising on the Islamic banks than on the conventional banks.

Keywords: monetary policy; Islamic banks; conventional banks; ARDL; auto-regressive distributed lag model; VECM; vector error correction model; multivariate causality; Islamic finance; Malaysia.

DOI: 10.1504/IJMEF.2009.029061

International Journal of Monetary Economics and Finance, 2009 Vol.2 No.3/4, pp.239 - 253

Published online: 02 Nov 2009 *

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