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An assessment of liquidity policies with respect to Islamic and conventional banks A case study of Indonesia

An assessment of liquidity policies with respect to Islamic and conventional banks A case study... Purpose – This paper aims to describe, compare and analyze liquidity policies from the central bank of Indonesia, particularly reserve requirements, with respect to Islamic as well as conventional banks. Design/methodology/approach – This paper provides some critical assessments on the policy applied by the central bank of Indonesia to both Islamic and conventional banks with regards to the reserve requirements applied in the Indonesian banking system. The analysis is based on whether both policies (Islamic and conventional) provide fairness to the banks as well as whether those policies support the real sector. In addition, the current global practice is also briefly described as a justification of the important and relevance of the current study. Findings – The authors find that the policy imposed on the Islamic banks is designed to boost the real sector, compared to that of conventional banks. For the policy with respect to Islamic banks, it recognizes the banks which have been doing well in their main role as financial intermediaries and “punishes” them when they fail to do so. This policy could not be found in the context of conventional banks. Practical implications – The authors argue that the current approach used for Islamic banks can also be adopted and imposed on conventional banks. This leads to a more stable financial system, since it supports the real sector. Originality/value – This paper is the first to analyze central bank policies with respect to banks (Islamic as well as conventional banks) in relation to their role as financial intermediaries. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Qualitative Research in Financial Markets Emerald Publishing

An assessment of liquidity policies with respect to Islamic and conventional banks A case study of Indonesia

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References (9)

Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
1755-4179
DOI
10.1108/QRFM-09-2011-0023
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper aims to describe, compare and analyze liquidity policies from the central bank of Indonesia, particularly reserve requirements, with respect to Islamic as well as conventional banks. Design/methodology/approach – This paper provides some critical assessments on the policy applied by the central bank of Indonesia to both Islamic and conventional banks with regards to the reserve requirements applied in the Indonesian banking system. The analysis is based on whether both policies (Islamic and conventional) provide fairness to the banks as well as whether those policies support the real sector. In addition, the current global practice is also briefly described as a justification of the important and relevance of the current study. Findings – The authors find that the policy imposed on the Islamic banks is designed to boost the real sector, compared to that of conventional banks. For the policy with respect to Islamic banks, it recognizes the banks which have been doing well in their main role as financial intermediaries and “punishes” them when they fail to do so. This policy could not be found in the context of conventional banks. Practical implications – The authors argue that the current approach used for Islamic banks can also be adopted and imposed on conventional banks. This leads to a more stable financial system, since it supports the real sector. Originality/value – This paper is the first to analyze central bank policies with respect to banks (Islamic as well as conventional banks) in relation to their role as financial intermediaries.

Journal

Qualitative Research in Financial Markets – Emerald Publishing

Published: Aug 2, 2013

Keywords: Reserve requirement; Islamic bank; Financing to deposit ratio; Loan to deposit ratio; Real sector economy; Reserves; Islam; Banks; Indonesia

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