IMPACT OF MONETARY POLICY SHOCKS ON THE CONVENTIONAL AND ISLAMIC BANKS IN A DUAL BANKING SYSTEM: EVIDENCE FROM MALAYSIA

This study analyzes the impact of monetary policy shocks on theconventional and Islamic banks in a dual banking system environment.The responses of the conventional banks to monetary policy shocks isexpected to be different from that of the Islamic banks due to the natureof the Islamic ones which only involve with interest-free instruments.Focusing on the Malaysian data covering the period from January 1999to December 2006.. the study aims at determining the sensitivity of theIslamic hanks by analyzing the impact of interest rate changes on thebanks financing and deposits. To provide meaningful comparison.. thesame analysis is also conducted on the conventional banks so as todetermine the unique risks confronting the Islamic banks.