On the Role of Islamic and Conventional Banks in Monetary Policy Transmission in Malaysia : Do Size and Liquidity Matter?

This paper empirically investigates the impact of monetary policy on the credit supply of Islamicversus conventional banks of Malaysia using an unbalanced panel datasets over the period 2005-2016. While estimating the effects of three alternative measures of monetary policy on banks'credit supply, we include several bank-specific and macroeconomic variables in the specificationas control variables. We provide strong evidence on the existence of the credit channel ofmonetary policy transmission mechanism in Malaysia. Yet, we show that Islamic banks respondconsiderably less to changes in monetary policy instruments as compared to their conventionalcounterparts. We also find that the monetary policy measures affect small-sized banks and less liquid banks more as compared to large-sized and more-liquid banks. Our findings suggest thatfor an effective monetary policy, there is a vital need to consider the nature of Islamic bankingwhile devising any monetary policy instruments to manage credit supply in the economy