Monetary Policy Transmission via Financing Channel for Islamic Banks in Malaysia

Abstract

Purpose – This paper sought to identify monetary policy transmission via financing channel in the light of systemically more important Islamic financial system in Malaysia. Focus will be centred on whether the financing channel of Islamic banks response appropriately towards monetary policy stance of Bank Negara Malaysia (BNM) which is essential in meeting the objective of the monetary policy implementation. Design/methodology/approach – The study employs the AutoregressiveDistributed Lag (ARDL) techniques to measure the relationships between variables associated with financing, base financing rate (BFR), overnight policy rate (OPR), bond yield, exchange rate, economic output as well as inflation. Findings – The outcome of the ARDL estimates indicate that the monetary policy transmission via financing channel is observed on short-run model. However none of the variables are statistically significant based on long-run model. Practical implications – Result of this study could justify new approach and strategy for monetary policy formulation and implementation in Malaysia. Originality/value – There were already a number of studies being conducted to measure the monetary policy transmission for Islamic banks in Malaysia and these studies in general proved that Islamic banks are the important conduit for channeling the monetary policy impacts. This study takes into account the recent development concerning Islamic banks and thus seeks to measure how more systematically important Islamic banks could post a threat to the overall efficiency of monetary policy transmission. The data used also reflect recent figures (January 2009 until December 2018).