December 2013 issue contents
The Transmission of Monetary Policy Through Conventional and Islamic Banks

by Sajjad Zaheer,a Steven Ongena,b and Sweder J.G. van Wijnbergenc


We investigate the differences in banks' responses to monetary policy shocks across bank size, liquidity, and type-i.e., conventional versus Islamic-in Pakistan between 2002:Q2 and 2010:Q1. We find that following a monetary contraction, small banks with liquid balance sheets cut their lending less than other small banks. In contrast, large banks maintain their lending irrespective of their liquidity positions. Islamic banks, though similar in size to small banks, respond to monetary policy shocks as large banks. Hence, ceteris paribus, the credit channel of monetary policy may weaken when Islamic banking grows in relative importance.

JEL Codes: E5, G2.

Full article (PDF, 50 pages 373 kb)

a University of Amsterdam and State Bank of Pakistan 
b University of Zurich 
c University of Amsterdam and Tinbergen Institute