The Islamic inter bank money market and a dual banking system: the Malaysian experience

The Islamic inter bank money market and a dual banking system: the Malaysian experience Purpose – This paper seeks to examine the operation of an Islamic inter‐bank money market (IIMM), within a dual banking system. Design/methodology/approach – The paper describes Malaysia's Islamic IIMM. It then examines some of the key risks associated with money market functions. An empirical examination of the extent to which yields in the IIMM are correlated with conventional money market yields is undertaken. The implication of this on interest‐rate exposure for the Islamic financial sector is discussed. Finally, the paper looks at some of the challenges and offers conclusions. Findings – The paper argues that even though an Islamic money market operates in an interest‐free environment and trades Shariah ‐compliant instruments, many of the risks associated with conventional money markets, including interest‐rate risks are relevant. The empirical evidence, based on Malaysian data, points to Islamic money market profit rates/yields that are highly correlated and move in tandem with conventional money market rates. Given the dynamics of fund flows and cross‐linkages, an IIMM operating within a dual banking system cannot sterilize itself from interest‐rate risks. In fact, the paper argues that such an IIMM may actually enhance interest‐rate risk transmission to the Islamic banking sector, by providing additional channels of transmission. Ironical as it may be, the operations of an IIMM in a dual banking system may serve to bring the Islamic banking sector into closer orbit with the conventional sector. Originality/value – The paper offers insights into the IIMM, focusing on Malaysia. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Islamic and Middle Eastern Finance and Management Emerald Publishing

The Islamic inter bank money market and a dual banking system: the Malaysian experience

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
1753-8394
DOI
10.1108/17538390810901140
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper seeks to examine the operation of an Islamic inter‐bank money market (IIMM), within a dual banking system. Design/methodology/approach – The paper describes Malaysia's Islamic IIMM. It then examines some of the key risks associated with money market functions. An empirical examination of the extent to which yields in the IIMM are correlated with conventional money market yields is undertaken. The implication of this on interest‐rate exposure for the Islamic financial sector is discussed. Finally, the paper looks at some of the challenges and offers conclusions. Findings – The paper argues that even though an Islamic money market operates in an interest‐free environment and trades Shariah ‐compliant instruments, many of the risks associated with conventional money markets, including interest‐rate risks are relevant. The empirical evidence, based on Malaysian data, points to Islamic money market profit rates/yields that are highly correlated and move in tandem with conventional money market rates. Given the dynamics of fund flows and cross‐linkages, an IIMM operating within a dual banking system cannot sterilize itself from interest‐rate risks. In fact, the paper argues that such an IIMM may actually enhance interest‐rate risk transmission to the Islamic banking sector, by providing additional channels of transmission. Ironical as it may be, the operations of an IIMM in a dual banking system may serve to bring the Islamic banking sector into closer orbit with the conventional sector. Originality/value – The paper offers insights into the IIMM, focusing on Malaysia.

Journal

International Journal of Islamic and Middle Eastern Finance and ManagementEmerald Publishing

Published: Aug 29, 2008

Keywords: Banking; Islam; Money markets; Malaysia

References

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