MONETARY POLICY, CAPITAL REQUIREMENT AND LENDING BEHAVIOUR OF ISLAMIC BANKING IN MALAYSIA

This paper tries to analyze the role of Islamic banks in the transmission of monetary policy and business cycle. This study will only analyse the Islamic banking in Malaysia. Previous studies such as, Keynes (1936) found that money plays an important role to economic growth. Furthermore, Gurley and Shaw (1995) began to redirect attention toward the overall interaction between financial structure and real activity, emphasizing financial intermediation, and particularly the role of financial intermediaries in the credit supply process as opposed to the money supply process. However, Bernanke and Blinder (1988) performed another view that looked into the assets side as a monetary policy channel to influence the economic activities. The changes in the monetary policy channel give an idea to regulate and strengthen the banking industry. Thus, several questions can be highlighted: how do the changes in the monetary policy tools affect the bank lending? If bank lending plays as monetary policy channel, do they affect the other portfolio? Do the current regulations (such as capital requirement) affect the Islamic bank lending? Furthermore, this analysis will be used the Generalize Least Squares approach to estimate the monetary changes toward Islamic banks portfolio. Annual data will be used from the year 1997 until 2004. The number of observations is based on the combination of time series and cross-sectional data, which is known as pooled data. Instead of that, we will use an unbalanced bank-level panel data set for Islamic banks (i.e., two full-pledged Islamic banks and thirteen Islamic windows).