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All Journal International Journal of Islamic Economics (IJIE)
Moutaz Abojeib
IFAAS, United Kingdom
Economics, Econometrics & Finance

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The Bank Lending Channel in Dual Banking Systems: How Market Power Shapes Monetary Policy Effectiveness Kinan Salim; Moutaz Abojeib; Wajahat Azmi; Mhd Osama Alchaar
Jurnal Internasional Ekonomi Islam Vol 5 No 02 (2023): International Journal of Islamic Economics
Publisher : The Postgraduate of Institut Agama Islam Negeri Metro Lampung

Show Abstract | Download Original | Original Source | Check in Google Scholar | DOI: 10.32332/ijie.v5i02.8057

Abstract

This paper investigates the effectiveness of the bank lending channel as a mechanism for monetary policy transmission in dual banking systems. Using generalized method of moments (GMM) estimators, we examine how market power and the presence of Islamic banks influence the bank lending channel. Our empirical results reveal that the effectiveness of this channel is conditional on the degree of market power. Specifically, we find that increases in interest rates are effective in altering bank lending only when the Lerner index, a measure of market power, reaches the threshold of 0.35. This suggests that the bank lending channel is only effective in markets with lower to average levels of competition (i.e. high market power). Additionally, we identify unique characteristics of Islamic banks that warrant further research for a comprehensive understanding of their role in the bank lending channel. Our study has important policy implications, particularly for emerging economies and dual banking systems, where regulatory measures may need to consider the intricate balance between market competition and effective monetary policy
Co-Authors Kinan Salim Mhd Osama Alchaar Wajahat Azmi