Islamic Interbank Money Market Research Articles

The effect of Sharia monetary policy instruments and Islamic bank financing on economic growth and inflation

Purpose – This study aims to determine the influence of Open Market Operations (Sertifikat Bank Indonesia Syariah, SBIS), Sukuk of Bank Indonesia (Sukuk Bank Indonesia, SukBI), Bank Indonesia Sharia Deposit Facility (Fasilitas Simpanan Bank Indonesia, FASBIS), Islamic Interbank Money Market (IIMM/Pasar Uang Antar Bank Syariah, PUAS), and Islamic Bank Financing on economic growth and inflation in Indonesia. Methodology – This study uses the Vector Error Correction Model (VECM), which uses monthly data from January 2017 to December 2022.Findings – The results of the VECM analysis show that, in the short and long term, the FASBIS and PUAS variables significantly affect economic growth. The Covid-19 pandemic has a significant effect in the short term, whereas Islamic Bank Financing has a significant effect in the long term. In the Inflation model, only FASBIS has a significant short-term effect. In the long-term, FASBIS, PUAS, and Islamic Bank Financing significantly affect inflation. Implications – The results of this research suggest that the Government and Bank Indonesia will need to re-evaluate Sharia Open Market Operations, especially SBIS and SukBI instruments. This is the impact of the estimation results on the Open Market Operation variable, which are not significant, and the IRF results, which are negative in the Economic Growth Model and positive in the Inflation Model, indicating that the Open Market Operation variable actually inhibits economic growth and triggers inflation. Originality – This study discusses the influence of Sharia monetary instruments before and after the Covid-19 pandemic and adds the SukBI instrument as a Sharia monetary instrument.

Pengaruh Inflasi dan Covid 19 terhadap Pasar Uang Antar Bank Syariah di Indonesi:

This study aims to analyse the effect of inflation and Covid 19 on the Islamic interbank money market and prove the validity of the fisher effect theory on the Islamic interbank money market in Indonesia. This study uses secondary data, namely time series data from the Islamic interbank money market and Inflation in Indonesia during the period January 2018 to November 2022. Meanwhile, the model used in this study is the Error Correction Model (ECM). The results showed that simultaneously in the long term and short term, inflation and Covid 19 variables had a significant effect on the Islamic interbank money market in Indonesia. Meanwhile, partially in the long term, the inflation variable has a positive and significant effect on the Islamic interbank money market. Covid 19 variable has a negative and significant effect on the Islamic interbank money market. In the short term, the Covid 19 variable has a negative and significant effect on the Islamic interbank money market in Indonesia. This study proves the existence of fisher effect on the Islamic interbank money market in Indonesia.
 Keywords: Islamic Interbank Money Market, Fisher Effect Theory, Covid 19

An Assessment of The Effectiveness of Islamic Inter-Bank Money Market Instruments in Oman

The objective of this study is to assess the Islamic inter-bank money market instruments in Oman and their associated challenges. Wakalah inter-bank investment, currently the most widely used liquidity management tool by Islamic banks in the inter-bank money market, has some limitations including an uncertain profit rate, risk of bankruptcy, reliance on conventional benchmarks, and lack of secondary market tradability. To address these limitations, the study adopts a qualitative research methodology and employs both library information and secondary data. The results suggest that alternative instruments, such as Mudharabah inter-bank investment, Islamic negotiable Instrument of Deposit, and Wadiah acceptance, could serve as viable alternatives to Wakalah for deposit and placement purposes in the Islamic inter-bank money market. These instruments are grounded in the widely accepted Mudharabah concept and are expected to receive widespread support from stakeholders. The implementation of these alternatives is predicted to enhance market options and activities, thereby supporting the growth and expansion of the Islamic finance sector in Oman. This expansion could enable Islamic banks to support Islamic social institutions such as Zakat and waqf, thereby improving the social welfare of the Muslim community.

Effect of Bank Indonesia Sharia Certificate and Inflation on Islamic Interbank Money Market Transactions in Indonesia

Sharia Interbank Money Market (PUAS) is a short-term investment activity in rupiah between market participants based on the principle of mudharabah, which is a funder's agreement with fund managers to carry out profit-making activities, and the profits will be distributed to both parties based on a previously agreed ratio. In order to support Bank Indonesia's objectives to achieve and maintain rupiah stability, Bank Indonesia may also exercise monetary control based on sharia principles. One of the achievements of the objectives referred to above is the controlled annual inflation rate, which is the final target of monetary policy carried out by Bank Indonesia. To achieve the final target of monetary policy, Bank Indonesia can exercise monetary control based on sharia principles, namely through Islamic monetary operations, which further affect the liquidity of Islamic banks. The implementation of Islamic monetary operations affects the level of money market yields between Islamic banks. The level of yield of PUAS as a liquidity instrument for Islamic banking will affect the financing issued by Islamic banks. Financing issued by the banking sector will affect the real sector which is expected to be able to achieve the final target of monetary policy. This study aims to determine the partial influence of SBIS on Islamic interbank money market transactions in 2017-2021 and the influence of inflation on Islamic interbank money market transactions in 2017-2021. The data used in this study is secondary data obtained from Bank Indonesia's official website in the form of monthly SBIS, Inflation, and Islamic interbank money market transactions from January 2017 to December 2021. The research method used is with a quantitative approach. The data analysis techniques used are descriptive statistical analysis, classical assumption test, multiple linear regression analysis, t test, f test, and determination coefficient test. Based on the results of data analysis, it can be concluded that patrially SBIS has a significant negative effect on Islamic interbank money maret transactions, and inflation patrially has no effect on Islamic interbank money market transactions. SBIS and inflation simultaneously affect money market transactions Islamic interbank in 2017-2021.

Effectiveness of Islamic Monetary Policy Transmission on Inflation and Economic Performance

The most crucial part for the economic development of a country is maintaining the stability of inflation to create a positive climate for economic and business activities. A number of efforts can be performed to achieve stable inflation and increase economic growth by designing monetary policy incorporating the variables of Bank Indonesia Sharia Certificate (SBIS), Islamic Interbank Money Market (IIMM), and Financing. Drawing on this issue, the in-hand study aims to examine the effectiveness of Islamic monetary policy transmission, using the instruments of SBIS, IIMM, and Financing, on inflation and economic performance (GDP) from the period of January 2011 to December 2020. Using secondary data, this study employs VAR/VECM approach by the assistance of Eviews program. The results reveal that in the short term period, inflation is significantly influenced by the IIMM, while GDP t is affected by the GDP t-1 and financing activities. In the long term period, both inflation and GDP are determined by SBIS and financing activities. In general, this study results in a conclusion that the variables of IIMM, financing activities, and GDP t-1 influence the economic performance both in short and long term periods. These results contribute as fruitful insights to developing financial strategies and monetary policy to maintain stable inflation and improve economic performance of a country.

Assessing the application of Islamic and conventional hedgings in Indonesia

PurposeBanks in Indonesia offer two currency-hedging mechanisms to business players to hedge their portfolio against exchange rate risk, namely, Islamic hedging and conventional hedging. Taking into account that Islamic finance stakeholders in Indonesia want to accelerate Islamic hedging transactions, assessing the feasibility of Islamic hedging to serve the business players is very important. Thus, this paper aims to compare the conventional and Islamic currency-hedging mechanisms, particularly to identify which one to be preferred by the business players, identify terms and conditions if Islamic hedging is more preferable, give information regarding the estimated profit and payment of the premium in adopting currency-hedging (both conventional and Islamic hedgings) and prove the workability of Islamic currency-hedging as a new hedging mechanism for the business players.Design/methodology/approachThe paper uses qualitative research methodology by comparing Islamic and conventional hedging and a quantitative research method by using a forward contract formula. Technically, the paper conducts a static simulation of the forward transactions by using both conventional and Islamic hedgings to hedge the foreign exchange (forex) credit received by business players from banks. The forward contract simulation uses US dollar (USD) against Indonesian rupiah (IDR) from December 2003 to February 2019 and the forward premium uses both Islamic and conventional money market rates called PUAB (conventional interbank money market) rate and PUAS (Islamic interbank money market) rate.FindingsThe paper finds that Islamic hedging is more preferable to conventional one due to some considerations which are the number of profitable months, the minimum payment of premium and the highest payment of profit. However, even though the Islamic hedging mechanism has the advantage of having a higher Islamic money market rate than the conventional one, the economic condition (particularly the movement of IDR exchange rate) has to be considered as well particularly during the volatile exchange rate movement.Research limitations/implicationsThe paper has not occupied macroeconomic variables such as inflation, GDP, international trade, as they might influence the movement of IDR exchange rate. In addition, it uses static simulation rather than a dynamic one.Originality/valueThis is the first paper assessing both Islamic and conventional hedging mechanisms in the case of Indonesia

Exposure to interbank investment and financing risk by Islamic banks: a dynamic panel analysis of Malaysia

PurposeThe Government of Malaysia has developed an Islamic Interbank Money Market since January 1994 with the objective to facilitate funding for the Islamic banking sector in the country. This platform also enables Islamic banks to obtain Sharīʿah-compliant funds from other Islamic banks. This study aims to examine the effects of interbank investment and financing risk on the financing decisions of Malaysia’s Islamic banks between 1994 and 2015. The financing decisions are used as financing measures to determine the effect of investing in the interbank market and financing risk indicators on financing.Design/methodology/approachThe descriptive, correlation and dynamic panel analysis results are derived with the help of LIMDEP 9.0 software.FindingsThe study found a negative relationship between the interbank investment variable with the financing decisions of Islamic banks. This reflects that an increase in interbank investment leads Islamic banks to reduce their level of financing. These findings prove that the investment activities between Islamic banks had a “substitution effect” and decreased their capability of financing because of their tendency to maintain liquidity.Originality/valueIslamic banks are confident that they will generate higher profits in the coming financial year. The economic conditions of Malaysia do not influence Islamic banks’ financing decisions, whereas Islamic banks in this study are more dependent on the balance sheet indicators.

Liquidity Risk and Return to Islamic Interbank Money Market Development

The low interest of Islamic banking in managing its liquidity risk management on Islamic Interbank Money Market (IIMM) has led to sluggish development of IIMM. The purpose of this study is to determine the effect of risk management of Islamic banking liquidity, determine the factors that cause the relationship of influence between the management of liquidity risk and IIMM Return, and knowing the prospects of risk management issues of Islamic bank liquidity concern to the development of IIMM. This research use descriptive and ARCH and GARCH. The results show the variant of EGARCH (1,1) as the best model with R2 1.44%. The Factors affect to IIMM are FDR, STM and Return.Keywords: IIMM Volume, Liquidity Risk, STM and FDR Risk, Return, ARCH and GARCH.

PREFER ENSI PELAKU PASAR DALAM MEMILIH INSTRUMEN PASAR UANG ANTAR BANK SYARIAH: PENDEKATAN ANALYTICAL HIERARCHY PROCESS (AHP)

This research aims to describe, compare and analyze the Sharia Banks’ preferences for selecting Islamic interbank money market instrument in Indonesia to manage their liquidity, what is the reason and research what factors determines market choices in the future. Data collection through in-depth interviews through questionnaires to market participants consisting of 7 Islamic banks representing 97% of all Islamic Banking Institutions in Jakarta. The survey was conducted in October 2017. The empirical analysis tool used in this study is the AHP model based on several criteria for the preferences of market players. The liquidity instruments in the Sharia Interbank Money Market in Indonesia are still lack in variance. Among the 3 (three) instruments available: 1) Interbank Mudharaba Investment Certificate (SiMA), 2) Interbank Sharia Commodity Trading Certificate (SiKA), and 3) Sharia Repo, only SiMA is often transacted. Arguing that: 1) SiMA is most widely known and available in the market; 2) The mechanism of SiMA is not complicated, it‟s simple profit-sharing calculation and bookkeeping also easier; 3) SiMA is relatively easy to run especially for its settlement compared to Sharia Repo and SiKA which require underlying settlement.

PENGURUSAN KECAIRAN INSTITUSI KEWANGAN ISLAM (IKI) DI MALAYSIA: ANALISIS PERBANDINGAN ANTARA KEPERLUAN INTERNATIONAL ISLAMIC LIQUIDITY MANAGEMENT (IILM) BERBANDING PASARAN WANG ANTARA BANK SECARA ISLAM (IIMM) (LIQUIDITY MANAGEMENT OF ISLAMIC FINANCE MANAGEMENT IN MALAYSIA: COMPARATIVE ANALYSIS BETWEEN INTERNATIONAL ISLAMIC LIQUIDITY MANAGEMENT (IILM) AND ISLAMIC INTERBANK MONEY MARKET)

Malaysia is a country that leads in the Islamic Financial sector. In fact, Malaysia is the first country that has established Islamic Interbank Money Market (IIMM) while banks in other countries only provide high liquidity instruments without platform. However, in 2010, International Islamic Liquidity Management (IILM) has been established to manage the liquidity globally. IILM is led by Malaysia because of its authority in Islamic Finance. Since its establishment, IILM manages the global liquidity through short term wakalah sukuk only. Thus, why is IILM needed if it only issues one instrument? In comparison, IIMM have many high liquidity instruments to meet the needs of IFI in Malaysia. In fact, IIMM is a strong platform for managing liquidity in Malaysia. By using the interview and longitudinal method, the researchers found out that IILM does not threaten the preexisting IIMM in Malaysia because both IILM and IIMM have different missions and visions. Therefore, IIMM is needed in Malaysia. However, IILM is not only needed in Malaysia but also globally. The world acceptance on the IILM’s short-term instrument would help in solving the issues regarding the excess liquidity in IFI. However, IILM still have to make various improvements to achieve its own objectives.

Pasar Uang Antarbank Dengan Prinsip Syariah

Islamic banking development that is increasingly requires the development of Islamic banking products, which are used to meet the needs and demands of its customers. Islamic banking can overcome or manage their liquidity in an Islamic way, both the sukuk and other types of investments, which certainly does not violate the Islamic sharia. The keys are used by banks in their liquidity management is the availability of primary and secondary reserves. In fulfillment of secondary reserve, bank can invest idle fund in Money Market. Islamic interbank money market is able to support smooth for Islamic banking to use Islamic interbank money market as a means to organize and manage liquidity. Interbank money market with Sharia principle is one of the facilities provided by Bank Indonesia as control of Indonesia banking in terms of utilization of idle funds held by Islamic banking. Interbank money market with Sharia, which has the right to publish is only a BUS or UUS because, in the future, BUS or UUS will be the manager of the funds, both in terms of SIMA (Mudharabah Interbank Investment Certificate) or SIKA (Commodity Interbank Certificate). Commodity Certificates based on Sharia (SIKA) is different with SIMA. SIKA uses murabahah contract. The trade is conducted in the commodity exchange. The interbank money market with Sharia principles is not much different from the risks that exist in the money market in general. However, the risk in interbank money market seems more minimal because is conceptualized and organized by Bank Indonesia.

Pasar Uang Antarbank Dengan Prinsip Syariah

Islamic banking development that is increasingly requires the development of Islamic banking products, which are used to meet the needs and demands of its customers. Islamic banking can overcome or manage their liquidity in an Islamic way, both the sukuk and other types of investments, which certainly does not violate the Islamic sharia. The keys are used by banks in their liquidity management is the availability of primary and secondary reserves. In fulfillment of secondary reserve, bank can invest idle fund in Money Market. Islamic interbank money market is able to support smooth for Islamic banking to use Islamic interbank money market as a means to organize and manage liquidity. Interbank money market with Sharia principle is one of the facilities provided by Bank Indonesia as control of Indonesia banking in terms of utilization of idle funds held by Islamic banking. Interbank money market with Sharia, which has the right to publish is only a BUS or UUS because, in the future, BUS or UUS will be the manager of the funds, both in terms of SIMA (Mudharabah Interbank Investment Certificate) or SIKA (Commodity Interbank Certificate). Commodity Certificates based on Sharia (SIKA) is different with SIMA. SIKA uses murabahah contract. The trade is conducted in the commodity exchange. The interbank money market with Sharia principles is not much different from the risks that exist in the money market in general. However, the risk in interbank money market seems more minimal because is conceptualized and organized by Bank Indonesia. Keywords: Sharia Money Market, Islamic Banking

Modus Operandi of the Islamic Money Market: A Proposal for Holistic Shariah Adaptation

This paper advocates for holistic Shariah adaptation of the modus operandi (operational model) of the Islamic interbank money market. It presents the reasons for the need for the substitution of the conventional methods of ‘tendering’, ‘auction’ and brokerage procedures in the market with the Shariah compliant methods of ‘al-Munaqasah,’ ‘al-Muzayadah’ and ‘al-Samsarah’ which are known and rooted in the Islamic law of transaction. It concluded that the adaptation of such procedures will lend more credence to the Islamic financial system that continues to receive criticism from various quarters. The study is a qualitative Shariah legal research. It is restricted to the jurisprudential analysis of the modus operandi of the market vis-a-vis the underpinning contracts of its procedure, in both the primary and the secondary stages of the markets.

The Susceptibility of Islamic Banks' Credit Risk towards Macroeconomic Variables

Credit risk is the most anticipated risk in the banking system. It is one of the key elements to assess systemic risk and stress testing financial fragility which is very helpful to come up with macro-prudential surveillance in financial systems. Unlike the conventional banking system, there is dearth of empirical study on macro-credit risk in relation with Islamic banking. As such, further research regarding the stability of the Islamic banking industry has become imperative. Accordingly, this paper is aimed at determining and assessing the long run vulnerabilities of Islamic financing sustainability in term of its response to changes in key macroeconomic variables by using time series econometric approaches of cointegration and vector autoregression (VAR). Based on the result of simulating variance decomposition (VD) and impulse response function (IRF), it is found that, sufficient evidence of long-run relationship between credit risk ratio in Islamic banking industry and the selected macroeconomic variables exist. The exchange rate, supply side-inflation, and growth have been indicated to negatively influence credit risk rate in Islamic banking, while money supply and Islamic interbank money market rate positively affect the risk rate. © 2014 IIUM Institute of Islamic Banking and Finance.

Islamic Money Market : An Instrument for Managing Liquidity Risk in Islamic Banks

The general consensus of financial experts is that liquidity is the lifeblood of any organisation, which is inclusive of Islamic banks. Hence, effective liquidity management is essential for the efficiency of banking institutions and the economy as a whole. The major provider of liquidity is the short-term money market instruments. Islamic financial institutions just like their conventional counterparts use short-term mobilised deposit funds to finance long-term loans and projects which expose them to asset liability mismatches and thus, are vulnerable to liquidity problems. Addressing the potential liquidity risk due to the cash-flow mismatches requires an efficient and vibrant Islamic money market as it is an essential and integral part of Islamic financial system. It therefore raises the need for developing an Islamic money market where Shari’ah -compliant financial instruments are to be traded and operated based on Shari’ah principles. Although it is considered the surest approach to sound liquidity risk management in Islamic banks, the dilemma that Islamic money markets are facing now is acute shortage of Shari’ah -compliant financial instruments and the controversies surrounding the few available instruments. A successful liquidity risk management therefore requires ensuring well functioning Islamic money markets with some if not all controversies/addressed through embarking on development of new products or promoting innovation in order to enable Islamic banks to compete effectively with their conventional counterparts. Hence, this study attempts to present a better understanding of various Islamic money market instruments, their roles in managing liquidity and their relationship with liquidity risk management. Keywords : liquidity risk, liquidity management, Shari’ah -compliance, innovation, new product development and Islamic inter-bank money market.

Performance of Asset and Commodity-Based Securities in Malaysia’s Islamic Inter-Bank Money Market

Performance of Asset and Commodity-Based Securities in Malaysia’s Islamic Inter-Bank Money Market Muhammad M Ma’aji, Abbas Rahima Ali, Ahmad Hassan Hadi Abstract The aim of this paper is to study is to review the performance of Asset based (Mudharabah) and commodity based (Murabaha) Islamic securities on a yearly basis in the Islamic Inter-Bank Money Market (IIMM) in Malaysia. The money market is a key appendage of the banking system and banking system is considered as very important for the development of any economy. Banks depend on the money market to manage their liquidity. While liquidity management is not the only use of money markets for banks, it is by far the most important. Recent statistics shows that the Malaysian Islamic banking sector continues to outperform the conventional banking sector with average annual asset growth rate of 18.6% during 2008-2012, in comparison to the conventional banking growth of 9.3% during the same period. The paper will also highlight the kinds of risk for Asset and commodity based Islamic securities in IIMM which are likely to be face by participant of the market. Full Text: PDF DOI: 10.15640/jibf.v2n2a1

The Islamic inter bank money market and a dual banking system: the Malaysian experience

PurposeThis paper seeks to examine the operation of an Islamic inter‐bank money market (IIMM), within a dual banking system.Design/methodology/approachThe paper describes Malaysia's Islamic IIMM. It then examines some of the key risks associated with money market functions. An empirical examination of the extent to which yields in the IIMM are correlated with conventional money market yields is undertaken. The implication of this on interest‐rate exposure for the Islamic financial sector is discussed. Finally, the paper looks at some of the challenges and offers conclusions.FindingsThe paper argues that even though an Islamic money market operates in an interest‐free environment and trades Shariah‐compliant instruments, many of the risks associated with conventional money markets, including interest‐rate risks are relevant. The empirical evidence, based on Malaysian data, points to Islamic money market profit rates/yields that are highly correlated and move in tandem with conventional money market rates. Given the dynamics of fund flows and cross‐linkages, an IIMM operating within a dual banking system cannot sterilize itself from interest‐rate risks. In fact, the paper argues that such an IIMM may actually enhance interest‐rate risk transmission to the Islamic banking sector, by providing additional channels of transmission. Ironical as it may be, the operations of an IIMM in a dual banking system may serve to bring the Islamic banking sector into closer orbit with the conventional sector.Originality/valueThe paper offers insights into the IIMM, focusing on Malaysia.