The Islamic Inter bank Money Market and a Dual Banking System : The Malaysian Experience

Bacha, Obiyathulla I. (2008): The Islamic Inter bank Money Market and a Dual Banking System : The Malaysian Experience. Published in: International Journal of Islamic and Middle Eastern Finance and Management , Vol. 1, No. 3 (2008): pp. 210-226.

Abstract

This paper examines the operation of an Islamic Interbank Money market (IIMM), within a dual banking system. 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 risk is relevant to an Islamic Money Market operating within a dual banking system. The empirical evidence based on Malaysian data, points to Islamic money market profit rates/yields that are highly correlated and move in sync 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 risk. 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Islamic Interbank Money Market, Dual Banking, Malaysia
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets; D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, Operations, and Impact; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

Aqdas, A.K. (2004), The Debate over ‘Mark-Up’, in Dawn News paper, May 29, 2004. Pakistan.

Bank Negara Malaysia, (1999); The Central Bank And the Financial System In Malaysia- A Decade of Changes, Corporate Services Department, BNM, Kuala Lumpur, Malaysia.

Bank Negara Malaysia; BNM Annual Report, various years.

Dufey, G. and Giddy, I.H, (1994); The International Money Market, 2nd Edition. Prentice Hall Publications, New Jersey, USA.

Gup, B.E. and Kolari, J.W. (2005); Commercial Banking, John Wiley & Sous Inc, Hoboken, N.J, USA.

Kohn, M(2004); Financial Institutions and markets, Oxford university Pres, New York, USA.

Malaysia Toward and Islamic state; Malaysian Islamic Money market from: Http://islamic–world.net/islamic -state/malay-islamoney market.htm

Muhammad, A (2004), Mark – Up is Permissible, in Dawn Newspaper, June 25, 2004, Pakistan.

Obiyathullah, I.B. (2004a); Dual Banking Systems and Interest Rate Risk for Islamic Banks, The Journal of Accounting, Commerce & Finance Islamic Perspective, Vol.8, No. 182, Dec.2004. pp. 1-42

Obiyathullah, I.B. (2004b); The Islamic Interbank Money Market; An Analysis of Risk, presentation at : Workshop session on Implementing Islamic Money Market Issuess & challenges; BNM, Mandarin Oriental Hotel, Sept. 2004, Kuala Lumpur, Malaysia.

OICU – IOSCO (2004), Islamic Capital Market Fact –Finding Report in Report of The Islamic Capital Market Task Force of the International Organization of Securities Commissions, July 2004.

The Money Market; from http://www.islamic –finance.com/c-moneymarket.htm

Yahia, A.R (1999); Islamic Instruments for Managing Liquidity; International Journal of Islamic Financial sevices Vol.1 No.1, April – June 1999.