Monetary Policy under the Dual

Banking
EBB 20403
Timur Rustemov
Monetary policy under the dual
banking systems
The ultimate aims of any successful monetary
policy for both Islamic and conventional
banking systems are concentrated towards the
achievement of sustaining real economic
growth; reducing inflation and lowering
unemployment.
Achieve Sustainable Economic Growth
Production capacity of economy
Stagnant Economy
Unemployment
develop efficiently intermediate funds in the
economy
Interest rates tend to rise during business
cycle expansions
Reducing Inflation
The aim for reducing the inflation rate interrelated with
price stability. The objective of price stability refers to the
general level of prices in the economy and implies avoiding
both a substantial increase in the price level (inflation) and
a permanent decline in the price level (deflation).
For the banking system, the inflation erodes the purchasing
power of financial wealth. If the Islamic banks can be sure
that prices will remain stable in the future, they will not
demand an inflation risk premium to compensate them for
the risks associated with holding nominal assets over the
longer term. Lower risk premiums on real profit rates
makes the monetary policy more credible and thus
increases the efficiency with which capital markets allocate
resources and this in turn makes investing more attractive
and fosters economic growth.
Reducing Unemployment
This results when all available resources (especially labour)
willing and able to engage in production are producing
goods and services. Falling short of this goal results in
unemployment; because some degree of unemployment
naturally exists in a modern complex economy, full
employment is achieved if the unemployment rate is about
5 percent. Unemployment means the economy forgoes the
production goods and services.
Two main transmission channels of unemployment over
banking stability is due to non performing loan (NPL) effect
and demand for new loans effect. NPL effect is an increase
in the unemployment rate will cause a contraction of the
reimbursing capacity of households, triggering an increase
in the default rate.
New loans
Islamic financial products
harmonization
The primary objective of International Islamic finance
regulatory framework is to promote cross boarder products
harmonization. (E.g. AAOIFI, IFSB, IIFM). However, These
International standard setting bodies do not posses any
formal supranational supervisory authority and its
conclusion do not and were never intended to have legal
force.
Different jurisdictions & Different views by scholars. -
Muslim countries have their own religious bodies which are
independent from one another. They establish their own
principles. A particular principle adopted by a specific
country is not necessarily regarded as distinct principle by
other countries. E.g. non-permissibility of BBA in most of
the countries but permissible in Malaysia.

Advantages
Promote market liquidity - Liquidity flows for efficient
resource utilization and supplementation that apply
equally across both conventional and islamic sectors
Harmonize disclosure standards, align distributions and
develop mutual recognition for primary offerings
Mutual recognition of market professionals involves
Promote investment through local intermediaries
Allow local intermediaries to distribute and market
products
Build and link infrastructure
Disadvantages
Duplicating or altering existing standards
Compliance burden
Constrain cross border product flows