An assessment of liquidity policies with respect to Islamic and conventional banks

Purpose This paper aims to describe, compare and analyze liquidity policies from the central bank of Indonesia, particularly reserve requirements, with respect to Islamic as well as conventional banks. Design/methodology/approach This paper provides some critical assessments on the policy applied by the central bank of Indonesia to both Islamic and conventional banks with regards to the reserve requirements applied in the Indonesian banking system. The analysis is based on whether both policies (Islamic and conventional) provide fairness to the banks as well as whether those policies support the real sector. In addition, the current global practice is also briefly described as a justification of the important and relevance of the current study. Findings The authors find that the policy imposed on the Islamic banks is designed to boost the real sector, compared to that of conventional banks. For the policy with respect to Islamic banks, it recognizes the banks which have been doing well in their main role as financial intermediaries and “punishes” them when they fail to do so. This policy could not be found in the context of conventional banks. Practical implications The authors argue that the current approach used for Islamic banks can also be adopted and imposed on conventional banks. This leads to a more stable financial system, since it supports the real sector. Originality/value This paper is the first to analyze central bank policies with respect to banks (Islamic as well as conventional banks) in relation to their role as financial intermediaries.