Efficiency of Monetary Policy Transmission Mechanism via Profit Rate Channel for Islamic Banks

This paper aims to measure whether the efficiency of monetary policy transmission for Islamic banks is affected in the light of systemically more important Islamic financial system in the Malaysia. Focus will be centred on the pace and magnitude of the transmission via profit rate channel for Islamic banks against interest rates channel of conventional banks. The paper relies on the Vector Auto Regression (VAR) methodology, focusing on the period from January 2000 to December 2012. The results show that the pass-through impact via profit channel of Islamic banks is still high and sizable. However, deteriorating signs can be sensed as Islamic banks become more systematically important in the financial system. Result of this study could justify new approach and strategy for monetary policy formulation and implementation in Malaysia. There were already a number of studies being done to measure the monetary policy transmission for Islamic banks in Malaysia and these studies in general proved that Islamic banks are the important conduit for channelling the monetary policy impacts. In contrast, this study seeks to measure how more systematically important Islamic banks could post a threat to the overall efficiency of monetary policy transmission, hence justifying new monetary policy approach