Macroprudential Policy and Regulation in a Dual Banking System: An Exploratory Perspective

Abstract

The chapter synthesizes the growing literature on macroprudential policy in particular countries with a dual banking system. In a dual banking system, both conventional and Islamic financial institutions operate side by side, but specific laws and regulations have been introduced for the Islamic financial institutions. Based on the analysis there is no “one size fits all”; different models might be effective depending on the country specifics. The choice among the different macroprudential models is mostly influenced by traditions, current institutional frameworks for other policies and political economy considerations. Furthermore, there is no differentiation of macroprudential policy framework between conventional and Islamic financial institutions that has been practiced by the authorities with dual banking system. The reason is to avoid regulatory arbitrage between these two financial institutions and the fact that Islamic financial institution is still largely based on mark-up or profit margin techniques in its operation.