Banking Models and Monetary Transmission Mechanisms in Malaysia: Are Islamic Banks Different?

The present paper comparatively evaluates the credit channel of monetary transmission process of Islamic banks and conventional banks by focusing on their lending/financing behaviour in responses to monetary policy shocks as well as other shocks. Adopting structural vector autoregression ( SVAR ) specification, we validate the significant responses of both conventional bank credit and Islamic bank financing to monetary policy shocks. However, the dynamic behaviour of Islamic banks following monetary policy shocks as well as other shocks tends to be different. Our analysis indicates that the Islamic bank financing tends to respond immediately while the conventional bank credit exhibits delayed responses to interest rate hikes. These results are generally robust to alternative specifications of the SVAR .