Do bank size and liquidity position matter in the monetary policy transmission mechanism ? : evidence from Islamic and conventional banks

Abstract EN

An empirical examination of the Tight Monetary Policy (TMP) effects on the financing decisions of banks is of significance for an in-depth understanding of the Credit Channel of Monetary Policy (CCMP).

Therefore, this paper aimed at examining the relative role of Islamic and Conventional Banks (CBs) in transmitting the effects of monetary tightening in Pakistan.

It also examines whether TMP influences banks’ credit expansion differently across bank size and liquidity position.

The empirical analysis consists of 11 Islamic Banks (IBs) (5 full-fledged IBs and 6 Islamic branches of CBs) and seventeen CBs with an unbalanced annual bank-level panel dataset covering the period 2005-2016.

The results reveal that both types of banks significantly cut their financing in periods of TMP, confirming the existence of the credit channel.

The results also indicate that TMP affected IBs less than their conventional peers.

The results also provide evidence that large-sized and more-liquid Islamic as well as CBs respond less to the TMP.

The findings suggest that the MP authorities may take into consideration the type of banking, bank size, and liquidity position to effectively control credit amounts in the economy.