Dual Banking System Research Articles

Performance assessment of participation banks based on Maqasid al-Shari'ah framework: Evidence from Türkiye

In a dual banking system, participation banks (PBs) are expected to follow Islamic principles, morals, and ethical norms, all of which ultimately align with Maqasid al-Sharia'ah (MS). This study aimed to assess performance of PBs in Türkiye beyond traditional yardsticks to accentuate their ethical, social, and financial roles compliant with the axioms of MS. A mixed method deploying qualitative and quantitative inquiry was used. The first stage used text mining, and the second stage developed the MS Performance Index (MSPI) by adopting entropy weights based on the Ghazalian perspective. The datasets were derived from 18 reports for 2019–2021. Türkiye Finans appeared to have the highest score, whereas Ziraat received the lowest on MSPI scores. PBs achieved the highest scores for the wealth objective component and the lowest score for the intellect component because they became market-oriented and thus their disclosures did not support and promote MS.

Corruption and Bank Risk‐Taking in Dual Banking Systems

ABSTRACTResearch Question/IssueWe investigate whether the risk‐taking of Islamic banks is affected differently by corruption compared to conventional banks. We also examine whether the characteristics of the Shari'ah Supervisory Board (SSB) of Islamic banks and the characteristics of the board of directors of conventional banks play an effective role in moderating such an effect.Research Findings/InsightsWe find consistent evidence that banks in countries with higher corruption have higher bank risk for both conventional and Islamic banks. However, this association is attenuated by the size of the SSB, the presence of female board members, and higher academic qualifications of SSB members. For conventional banks, the moderating effect of the presence of female directors and academically qualified members on the board of directors is also prevalent but to a lesser extent.Theoretical/Academic ImplicationsThis study contributes to the corporate finance literature more generally by highlighting the role played by corporate governance, particularly the presence of female members and academically qualified members on the SSBs of Islamic banks and on the board of directors of conventional banks, in mitigating the effect of corruption on bank risk‐taking for the two bank types.Practitioner/Policy ImplicationsOur findings are based on a matched sample of banks operating in 10 OIC (Organization of Islamic Cooperation) countries and have important implications for bank stability and bank governance reforms. On the detrimental side, urgency of the anti‐corruption campaigns in these countries is justified due to the significant effect of corruption on risk‐taking for both conventional and Islamic banks. Overall, to better fight corruption in countries with dual banking systems, there is a need to enforce stricter rules for all types of banks.

Bank liquidity creation, loan concentration and liquidity risk: a comparative analysis of dual banking system

Purpose Keeping in view the robust growth of Islamic banking around the globe, this study aims to comparatively analyze the association between liquidity creation and liquidity risk for Islamic banks (IBANs) and conventional banks (CBANs) in Pakistan and Malaysia over a period of 2004–2021. The moderating role of bank loan concentration on the aforementioned relationship is also studied. Design/methodology/approach Regression estimation methods such as fixed effect, random effect and generalized least square are deployed for obtaining results. Liquidity creation Burger Bouwman measure (cat fat and noncat fat) and Basel-III liquidity risk measure (liquidity coverage ratio) are also used. Findings The results give us insight that liquidity creation is positively and significantly related to liquidity risk in both IBANs and CBANs of Pakistan and Malaysia. This relationship has been moderated negatively (reversed) and significantly by credit concentration showing the importance of risk management and loan portfolio concentration. Practical implications It is analyzed that during the process of liquidity creation, IBANs in Pakistan faced more liquidity risk for both on and off-balance sheet transactions in the presence of moderation of loan concentration than IBANs in Malaysia necessitating strategic policy-making for important aspects of liquidity risk management and loan concentration while creating liquidity. Originality/value Such studies comparing IBANs and CBANs comparison keeping in view liquidity creation, liquidity risk and loan concentration are either limited or nonexistent.

Monetary Policy and Inflation Targeting Framework in Indonesia Dual Banking System

Since 1990 the use of inflation as a nominal anchor used as the main target of monetary policy began to be an option for central banks in several countries. The new monetary policy framework is then known as Inflation Targeting Framework (ITF). This study tries to look at some important variables that affect the inflation rate within the framework of the Inflation Targeting Framework concept using Vector Error Correction Model. The results of data processing using VECM analysis can determine the behavior of Bank Indonesia Rate (BI Rate), Money Supply, Interbank Money Market (PUAB), Sharia Interbank Money Market (PUAS), and Sharia Bank Indonesia Certificates (SBIS). These variables significantly affect the inflation rate. The results of this study can provide important information for decision makers and academics as an evaluation of the application of ITF based on its application in Indonesia.

Market Share Factors of Sharia Banks in Indonesia and Malaysia

Market Share Factors of Sharia Banks in Indonesia and Malaysia

Analyzing the Influence of Bank Competition on Credit Risk: Perspectives from Indonesia's Dual Banking System

This study analyzes the effect of competition banks on credit risk in the dual banking system in Indonesia. This research was conducted using a purposive sampling technique in selecting a sample of 5 conventional commercial banks and 5 Islamic commercial banks. The method used is the Generalized Method of Moments (GMM) from 2011 to 2020. Credit risk for Conventional Banks is measured by the value of Non-Performing Loan (NPL), while Islamic Bank Financing is measured by the value of Non-Performing Financing (NPF). The results of this study indicate that Return on Assets (ROA) for Conventional Banks and Islamic Banks has a significant effect on credit risk in the dual banking system, Loan to Deposit Ratio (LDR) for Conventional Banks does not have a significant effect on Non-Performing Loan (NPL) while Financing to Deposit Ratio (FDR) of Islamic Banks has a significant level 2 influence on Non-Performing Financing (NPF). Bank size does not have a significant influence on credit risk in the dual banking system, and the Lerner Index for Conventional Banks has a significant effect on Non-Performing Loan (NPL), while the Lerner Index for Islamic Banks has no effect on Non-Performing Financing (NPF). The Central Bank in making policies can see that the level of competition for banks in the dual banking system in Indonesia is categorized as a monopolistic competition market, where each bank has its own market segment so that it has market power that is strong enough to set prices that are relatively.

Islamic finance and economic growth: Global evidence

AbstractWe document the contribution of Islamic finance development to economic growth by studying a global sample of countries engaged in providing Islamic financial services. Fifteen countries are included in the sample based on significant Islamic banking share in total domestic banking assets. Results are documented through the application of the Panel regression (EGLS) method for the period 2001–2020. Findings suggest a positive contribution of the Islamic Financial Services Industry (IFSI) to economic growth in sample countries in multiple regression settings. Additionally, a range of control variables, including domestic credit to the private sector, inflation, and trade openness, contribute significantly to economic growth. We recommend the creation of a conducive environment for the promotion of IFSI on account of the built‐in stability feature and positive contribution to economic growth. We also recommend overall development in the financial sector of selected economies, including credit availability to the private sector and trade openness. Our study helps in understanding the dynamics of economic growth in economies with a dual banking system (conventional & Islamic). This article contributes to the literature by studying a larger sample of countries engaged in the practice of Islamic finance and considering the significance of the market share of assets under IFSI.

The Bank Lending Channel in Dual Banking Systems: How Market Power Shapes Monetary Policy Effectiveness

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

The Impact of Capital Regulations on Bank Margins of ASEAN Banking Sector

Basel Committee on banking supervision (BCBS) has issued Basel which requires the banks to comply with the minimum capital requirement after the crisis. Nevertheless, whether the requirement imposes impact the banking sector which comprises a dual banking system, in a positive manner is still questionable. Given the higher capital costs from the strict capital requirements, banks are being forced to raise bank margins. This study investigates the effect of capital regulations on conventional and Islamic banks’ margins covering the ASEAN banking system from 2009 to 2017. The empirical analysis uses dynamic panel data frameworks to reveal several factors affecting bank margins. Overall, the results suggest that the total regulatory capital ratio helps reduce the margins of conventional banks but does not influence the margins of Islamic banks. As for the Tier-1 capital ratio, the variable increases the Islamic bank margins but does not significantly affect conventional bank margins. Based on the analysis results, regulators of conventional banks need to impose capital requirements as suggested by Basel III to reduce bank margins. Meanwhile, as for Islamic banks, the bank margins can be reduced if regulators can introduce a separate set of requirements tailored explicitly for Islamic banks.

Bibliometric Analysis on Islamic and Conventional Money Demand

The Islamic finance industry in the world has been snowballing in the last ten years. In its implementation, the Islamic financial system does not use an interest rate system but uses a profit-sharing system. The increase in global Islamic financial assets is in line with the theory that states that the profit-sharing system is better than the interest system because the Islamic money demand model, which uses the profit-sharing system, tends to be more resistant to shocks compared to the conventional money demand model which uses the interest system. This research aims to prove the validity of this theory. By using the method of bibliometric, the author found 391 studies that discussed "Islamic and Conventional Money Demand". The results show that there are 5 cluster which have become research paths, namely the Economic Policy Framework and Financial Analysis, Real Sector Activities, Economic Research Matrix, Financial Governance in Dual Banking Systems, and Money Markets.

The impact of management performance on risk-taking behavior in a dual banking system: A cross-country analysis

In an era defined by global economic uncertainty, the role of management performance in influencing bank risk-taking has become pivotal. This urgency stems from the evolving dynamics of the banking sector and the need for robust risk management strategies. This study investigates the relationship between management performance and banks’ risk-taking behavior, drawing data from 248 banks across eight countries comprising Indonesia, Malaysia, Bangladesh, Pakistan, Saudi Arabia, Oman, Bahrain, and the United Arab Emirates spanning 2013–2021 using panel data analysis. The study reveals that management performance measured by a cost-to-income ratio (β = –0.44, p < 0.01) has a negative and significant relationship with bank risk-taking behavior. In essence, a bank with superior management performance, indicated by a lower cost-to-income ratio, tends to have greater financial stability, as evidenced by a higher Z-score. Notably, external factors like the financial crisis and institutional development as moderating variables do not significantly alter the relationship between management performance and banks’ risk-taking behavior. The study also discovers that Islamic banks (β = 0.31, p < 0.01) outperform their conventional counterparts in risk management and management performance. However, it is worth noting that the results of regional analysis demonstrate variations across the Southeast, South, and Middle East regions. After conducting several robustness check tests, the findings of this study remain consistent, offering valuable implications for both policymakers and bank management. These insights emphasize the importance of formulating appropriate regulations and frameworks to enhance management performance at the banking level. AcknowledgmentThe authors gratefully acknowledge the support from Direktorat Penelitian dan Pengabdian Masyarakat (DPPM) Universitas Islam Indonesia No: 006/Dir/DPPM/70/Pen.Unggulan/III/2023 for providing a research grant to this study.

Bank-specific factors, market conditions and the riskiness of Islamic and conventional banks: evidence from recent quantile approaches

PurposeThe purpose of this paper is to investigate how bank-specific factors affect the riskiness of conventional and Islamic banks in response to shocks in major financial indices as market conditions change.Design/methodology/approachThe authors use a multivariate quantile model using daily equity returns data to analyze financial risk spillovers in the values at risk that may occur between major financial indices and the equity prices of conventional and Islamic banks worldwide. Then, using both quantile and quantile-on-quantile models, the authors examine the effects of bank-specific variables such as leverage ratio, bank size, return on equity and capital adequacy ratio on the initial impact of shocks in major global financial indices on bank equity price returns at different quantiles of shocks and bank-specific variables.FindingsThe findings reveal that major financial indices can predict bank stock returns. Moreover, the authors find that the effect of bank-specific factors on the riskiness of banks is heterogeneous in that it depends on the bank type (Islamic vs conventional), the level of banking variable (high vs low) and, more importantly, market conditions.Originality/valueTo the best of the authors’ knowledge, this is the first study that compares the dual banking system with stock market performance while considering bank-specific variables as market conditions change. The results of this study reveal that the effect of bank-specific variables on bank performance varies according to different quantiles of shocks and bank-specific variables. Islamic banks may echo or differ from conventional banks depending on the specific factor under investigation.

PENGARUH PERSEPSI, MOTIVASI, DAN PENGETAHUAN PRODUK TERHADAP MINAT MENABUNG DI BANK SYARIAH PADA MASYARAKAT KABUPATEN SIDOARJO

Indonesia’s development Banking is increasing from year to year. Since the enactment of Law Number 10 of 1998 which states the existence of a dual banking system and the 2003 MUI fatwa concerning banking interest rates prohibition, this is a strength for Islamic banks to continue to grow. This very significant Islamic banks development is proof that Islamic banks are getting closer to the community. The people of Sidoarjo Regency themselves have their own interest in saving at Islamic banks, whether it is seen from the products they have, their perception of Islamic banks, or the motivation for the community in Sidoarjo Regency to save in Islamic banks. This study is a quantitative study that analyzes the effect of perception, motivation, and product knowledge on interest in saving in Islamic banks. The sample in this study found 71 respondents, namely the people of Sidoarjo Regency who have become customers at Islamic banks. The data obtained were processed using SPPS 23. The results of this study indicate that partially perception, motivation, and product knowledge affect the interest in saving in Islamic banks. Simultaneously perception, motivation, and product knowledge have a significant effect on interest in saving in Islamic banks Keywords: Perception, Motivation, Product knowledge, Interest in saving

The effect of capitalization on the competition-stability Nexus: Evidence from dual banking systems

The purpose of this paper is investigate how bank capitalization affects the relationship between competition and bank stability in dual banking systems. Using bank-level and country-level data from 17 countries over the period 2000–2019, the evidence shows a U-shaped relationship between competition and bank stability highlighting the dual importance of the franchise value and the risk-shifting paradigms in dual banking systems. The comparative analysis between conventional banks (CBs, hereafter) and Islamic banks (IBs, hereafter) reveals that, compared to CBs, competition is more detrimental to the stability of IBs. Importantly, our analysis reveals that higher bank capitalization moderates the negative effect of competition on bank stability and that the magnitude of the effect is similar between CBs and IBs.

Monetary Stability under Dual Banking System before Covid-19 Pandemic in Indonesia

The Indonesian monetary authority or the Central Bank of Indonesia has established a policy in accordance with the constitution No. 3 in 2004, the monetary policy taken by Central Bank of Indonesia is the inflation targeting framework (ITF). To achieve this, Central Bank of Indonesia established intermediary policies which are regulating the volume of the money supply, stipulating the minimum reserves banking and regulating credit or financing. From some of these intermediary policies, the authors are interested in researching monetary policy in the dual monetary system in Indonesia, where the instruments used by each monetary system are different, so which system is the most stable and sustains Indonesia's growth and which system is the best to achieve ITF goals. The method used is Autoregressive Distributed Lag (ARDL) with data from 2010-sep 2018. The results show that the instruments used in conventional monetary systems based on interest rates have no influence on economic growth, whereas instruments in the Islamic monetary system have an influence on economic growth.

KONSEP INVESTASI (AL-MUDHARABAH): PERBANDINGAN TEORI EKONOMI SYARI'AH DAN KONVENSIONAL

In a mudharabah investment profit sharing transaction, both parties can enter into a business agreement, where one party becomes the capital investor and the other party becomes the capital manager. From the management of investment funds, investment profits (profit) will be obtained and will then be divided into two according to the agreement (al-ittifaq). The implementation of the principle of investment profit sharing does not only apply in Sharia Financial Institutions, but also in Conventional Financial Institutions in the form of mudharabah and musyarakah savings and loans referring to the dual banking system regulations in Law no. 10 of 1998 concerning Banking. The agreement pattern in LKS is more tied to the principles and principles of muamalah which are profit and social oriented, whereas in LKK it is solely profit oriented. The profit and loss sharing pattern in LKS is based on the margin fee from profits (profits), while in LKK it is based on the level of interest rate fluctuations on principal savings and loans. The level of effectiveness in implementing investment profit sharing in LKS is more likely to enable efforts to accelerate the level of economic growth than in LKK.

Does gender diversity affect financial strength differently in conventional and Islamic banks? Evidence from MENA countries

This study examines the effect of board gender diversity (i.e., the presence of female directors on the board) on the overall bank's financial strength. We also investigate the association on a dual-banking system consisting of conventional and Islamic banks internationally. We employ a scenario-based multi-criteria approach to measure the bank overall financial strength index conceptualizing five bank financial criteria that derived from the CAMEL framework (i.e., acronym stands for “Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity”). Using an international sample, we find that more gender diversity in the boardroom is associated with stronger financial health positions across both bank types. Our results imply that even though Islamic banks face additional agency costs, the role of female members in the boardroom is still similar. Our findings provide supporting evidence for recruiting females to serve on boards in the dual-banking industry.

The Validity of the Bank Credit Channel in the Monetary Transmission Mechanism: VAR Analysis of Participation Banks

The relationship between Islamic banking and monetary policies, and the way this relationship is reflected in the real sector has attracted increasing attention, primarily because of the growing importance of Islamic banking activities. Therefore, a review of the effectiveness of the loan schemes of Islamic banks in Turkey can make a significant contribution to the literature. This study analyzes whether the loan schemes of public and private participation banks operating in Turkey’s dual banking system, are effective. To this end, the study relies on variance decomposition and impulse response function analyses of VAR models compiled from monthly data between 2009:01 and 2020:03. The industrial production index represents economic activity, the interest rate applied to consumer loans, and the total money supply (M1), representing the monetary policy instruments. The model also includes total loans and deposit variables made available for the participation banks, representing the bank loan scheme and other variables, including the nominal exchange rate and consumer price indexes. The study measures the responses of the exchange rate, inflation rate, industrial production index, participation banks’ total loans, and total deposits to one-unit shocks applied to monetary policy and interest rates. The findings from the impulse-response functions indicate that the credit channel in participation banks is partially additional since their total loans and deposits react to monetary policies in certain periods due to changes in money supply and interest rates. However, they cannot reflect this at the production level.

IMPLEMENTING MONETARY POLICY WITH APPLICATION OF SUKUK: CHALLENGES AND POLICY DIRECTIONS

Each market economy uses monetary policy to attain certain macroeconomic goals of price stability, higher growth and employment. A market economy having an interest-based conventional banking system applies mainly interest-based tools to attain the objectives of monetary policy. In contrast, a market economy with interest-based and interest-free banking needs to apply Shariah-compliant monetary instruments vis-à-vis conventional tools for attaining the goals of the monetary policy. As there is a paucity of quality research on Sukuk-based monetary policy, the current paper will explore Shariah compliant monetary instrument ‘Sukuk’ for use as a monetary tool in dual banking, examining experiences of Shariah-based monetary operations in different countries. The paper will also examine the challenges of monetary policy operating in the dual banking system of Bangladesh with policy options for addressing the challenges.
 
 Keywords: Dual banking system, monetary policy, Shariah based monetary operations, Sukuk, Qard-al-Hasan.
 
 Cite as: Md. Aminul, I., Md. Golzare, N., Rafiun, N., & Md. Sharif, H. (2023). Implementing monetary policy with application of Sukuk: challenges and policy directions. Journal of Nusantara Studies, 8(2), 27-43. http://dx.doi.org/10.24200/jonus.vol8iss2pp27-43

Prohibition of Usury in the Perspective of Hadith and its Implementation in the Monetary System in Indonesia

. The uncompromising emphasis of usury on socioeconomic justice and equitable distribution of income and wealth. From this it is very clear, that with the interest system, the distribution of money will not be evenly distributed, there is no justice, who can enjoy only those who have large capital, while those who are weak in terms of capital, will be downtrodden, out of business which in turn will increase the statistics of the poor. The Prophet in the hadith described above expressly prohibits eating usury, because it is included in the seven major sins that are cursed and destroyed by Allah SWT. Usury is Ziyadah or an addition to a loan that is already due. The practice of usury in the capitalist economic system is one of the sources of the economic crisis in this world. Indonesia recognizes the existence of dual banking systems in the monetary system, namely an interest-free Islamic banking system and a conventional banking system with an interest system.