Impact of islamic money market development on islamic bank liquidity management: a case study of Indonesia

Alamsyah, Janoearto and Masih, Mansur (2017): Impact of islamic money market development on islamic bank liquidity management: a case study of Indonesia.

Abstract

Islamic banking industry is growing in Indonesia. Nevertheless, the growth in the industry has its limitation of choices for liquidity management, in terms of Islamic money market and sovereign sukuk market. In comparison to Malaysia, Indonesia started its Islamic money market and sovereign sukuk market in 2008, much later than Malaysia, which began in 1994, even though Indonesia has bigger potential for Islamic banks growth due to the size of its muslim population and its economy. This paper seeks to investigate the impact of the Islamic money market development on the Indonesian Islamic Bank’s operational aspects. Logically, if the development of Islamic interbank market had successfully improved the liquidity management practices, then this interbank market would affect the operational indicators of the Islamic banks. To achieve this, the paper tested whether two variables from Islamic money market, i.e SBIS rate (Sertifikat Bank Indonesia Syariah rate), the benchmark rate generated from Islamic money market auction, and Islamic money market transactions volume, serve as signal to the changes of the operational indicators of the Islamic banks. The paper used one of time series technique called Auto Regressive Distributed Lag (ARDL) for testing the relationships amongst operational variables: total costs, total mudharabah deposits, total equity-based financing, banks’ capital, profit sharing distribution, non-operating income, and Islamic money market variables: SBIS rate and Islamic Money Market transaction volume. Our findings tend to indicate that there had been an impact of Islamic money market activities on the operational indicators of Islamic banks in Indonesia, which implies that the initial development of Islamic money market had been on the right track in facilitating the Indonesian banks’ liquidity management. The findings also suggest that future development of Islamic money market and capital market are essential to improve the liquidity management of Islamic banks in Indonesia.

• Item Type: MPRA Paper
• Language: English
• Keywords: Islamic money market, Islamic bank liquidity, ARDL, Indonesia
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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