Islamic Financing and Monetary Policy in a Dual Banking System: Experience and Evidence from Malaysia

Transcription

1 Islamic Financing and Monetary Policy in a Dual Banking System: Experience and Evidence from Malaysia MUHAMED ZULKHIBRI Ph.D Islamic Research and Training Instute Islamic Development Bank All findings, interpretations, and conclusions are solely of the authors opinion and do not necessarily represent the views of the Islamic Development Bank. 2/23/ Presentation outline 1 Introduction 2 Malaysia Islamic Banking System 3 Related Studies 4 Data and Methodology 5 Conclusion /23/2016 1

2 Introduction o Under a dual banking system, to the extent that financial constraints vary wh banks abily to access other sources of financing. o Understanding this mechanism is crucially important, where Islamic banks have increasingly played a dominant role in Malaysia financial system. o The paper examines the determinants of Islamic financing and the cross-sectional differences in the way that Islamic banks respond to financing rate across bank-specific characteristics. 2/23/ Malaysia Islamic Banking System 2/23/ /23/

3 Gradual and pragmatic approach to development of Islamic financial sector Develop infrastructure Increase number and diversy of domestic & foreign players to stimulate competion Develop and deepen money, capal & equy markets Build intellectual and human capal Islamic depos insurance Develop legal & regulatory framework Strengthen Shariah framework Establish effective legal structure Enhance risk management Setting international standards through Islamic Financial Services Board (IFSB) Facilative Legal and Regulatory Framework Ensuring Robust Shari ah Governance Framework Promote Human Capal Development Encourage Innovative Product and Services Tax Incentives for Investment Activies Facilating Dispute Settlement Instution Creating a conducive environment for business Legal, Regulation and Shari ah Products and Markets Instutional Development Knowledge, Education and Expert Enabling environment for sustainabily of a comprehensive Islamic financial system 2/23/ Rapid milestone in development of Islamic financial sector Enactment of Islamic Banking Act and Takaful Act paving the way for an Islamic Financial System Enactment of Government Investment Act empowering Government to issue Government Investment Issue Establishment of Securies Commission (SC) mandated to supervise and develop the capal market Issuance of Cagamas Mudharabah Bonds world s first MBS issued and structured according to Islamic securisation principles Introduction of Mudarabah Interbank Acceptance tool for interbank players to manage daily liquidy SC s Shariah Advisory Council was formed, wh the approval of MOF Islamic Financial Accounting Working commtee was formed to provide guidance on accounting treatment on Shariahcompliant transactions Unveiling of the Capal Market Masterplan part of s objectives is to establish Malaysia as an international Islamic capal market centre Introduction of tradable Government Investment Issue allow GII to be traded in the secondary market Guthrie Group issued first global corporate Islamic bond Malaysian Government issued the inaugural global sovereign Sukuk Ijarah 2003 Tax deductions on expenses incurred in issuing Islamic securies Launch of first instutional Islamic stock broking service Introduction of Wadiah acceptance tool for BNM in managing liquidy /23/2016 Launch of the Islamic Money Market Webse to promote transparency and dissemination of information Guidelines on Offering of Islamic Securies introduced to facilate structuring of new Islamic products Sarawak Economic Development Corporation launches first global Sukuk Ijarah in the form of floating rate trust certificates 2005 Issuance of Islamic debt secury by Multilateral Development Banks and Multilateral Financial Instutions Introduction of Islamic forward contract tool to hedge currency exposure for interbank players and corporations Islamic Financial Services Act (IFSA) 2013 Sukuk BNM Ijarah Bank Negara Monetary Note Islamic (BNMN-i) Commody Murabahah depos BNMN- Murabahah BNMN-Isthmar Collateralised Murabahah Islamic Range Matury Auction (irma) 6 3

4 Islamic money market co-exist and operate in a dual system Interest rate - money market - BLRs/KLIBOR - depos rates - Bond Overnight Policy Rate Bank Negara Malaysia Financing rate - i money market - BFRs/KLIRR - depos returns - Sukuk Volume of bank cred Cost of borrowing Volume of bank financing Mark-up (fee) of financing Aggregate demand 2/23/ Divergent between AFR and ALR, convergent between BFR and BLR on retail financing 7.50 Average Rate Islamic Correlation= Conventional Base Rate Source: Bank Negara Malaysia 2/23/

5 Islamic interbank rates follow closely changes in the conventional money market interest rates Islamic Conventional Source: Bank Negara Malaysia 2/23/ Increasing diversy and sophistication of Islamic money market instruments Others (6%) Others (3%) Wadiah Acceptance 16% BNMN 11% Statutory Reserve Requirement (SRR) 13% Direct Money Market Borrowing 29% Statutory Reserve Requirement (SRR) 17% Direct Money Market Borrowing 22% Repo Borrowing 13% Total liquidy RM207.5 billion 2006 MM Borrowing 60 % BNMN-I 12% BNMN 20% Total liquidy RM336.8 billion 2013 Commody Murabahah Programme Wadiah Acceptance 13% Repo 6 % BNMN-I 16% Total liquidy RM269.9 billion 2014 BNMN 24% Commody Murabahah Programme 2% Repo 6 % Wadiah Acceptance 10% 1% Source: Bank Negara Malaysia 2/23/

6 Government policy continues to support market development 1 To raise the required financing, Government will first sell s Shariahcompliant assets, e.g. equies, to investors for spot cash payment. Government Upon completion of sale, investors will subsequently sell the assets back to Government at prof paid on deferred, and GII will be issued to evidence the indebtedness Prof from sale will be paid periodically such as semi-annual basis, Gov t sells the Investors would sell back Prof portion is Asset price is paid representing the coupon on GII. assets to investors the assets to Gov t at asset paid to investors to investors at for spot payment price plus prof to be paid on periodic basis matury. on deferred basis. The GII will then GII will be issued to be redeemed On matury (i.e. deferred payment), Government will pay the asset cost, investors to represent the representing the principal amount, plus prof and GII will be redeemed. indebtedness Financial Instution (FI) Fund flows Asset flows Issuance / Redemption Source: Bank Negara Malaysia (2012) 2/23/ Relatively small share of total banking system assets 100% 90% 6% 6% 4% 4% 4% 4% 3% 3% 2% 2% 7% 8% 14% 16% 17% 18% 20% 21% 21% 22% 80% 70% 60% 50% 40% 87% 86% 82% 80% 79% 78% 77% 77% 76% 75% 30% 20% 10% 0% Commercial Bank Islamic Bank Investment Bank Source: Bank Negara Malaysia 2/23/

7 Mainly composed of deferred payment and cost-plus-sale financing modes 100% 90% 80% 70% 60% 50% 40% 30% 21% 19% 16% 15% 18% 20% 20% 19% 21% 22% 1% 2% 2% 4% 5% 6% 7% 11% 15% 7% 17% 7% 15% 15% 17% 21% 25% 29% 30% 30% 30% 29% 27% 26% 23% 22% 20% 18% 20% 10% 41% 37% 33% 32% 34% 32% 32% 29% 24% 19% 0% Bai Bhaman Ajil Ijarah Ijarah Thumma Al-Bai Murabahah Musyarakah Mudharabah Istisna' Others Source: Bank Negara Malaysia 2/23/ Related Lerature 7

8 Lending behaviour influenced by bank characteristics o Gilchrist and Zakrajsek (1995); Kashyap and Stein (1995), Favero et al. (1999) - distributional effect of monetary policy on bank creds o De Haan (2003); Gambacorta (2005); Brissimis et al. (2003); Kaufmann (2003); Ehrmann et al. (2003); Hernando and Martinez- Pages (2003) evidences for developed economies o Horvath et al. (2006); Golodniuk (2006); Pruteanu-Podpiera (2007); Gomez-Gonzales and Grosz (2007); Juurikkala et al. (2011); Matousek and Sarantis (2009); Kohler et al. (2000); Sengonul and Thorbeck (2005) evidences for developing economies o None of the study on Malaysia has employed bank-level data in the empirical analysis for Islamic banks 2/23/ Strong relationship between Islamic financing rate and interest rate o Chong and Liu (2009) find that retail Islamic depos rates mimic the behavior of conventional interest rates o Kasri and Kassim (2009) find that rate of return and interest rate move in tandem, Zulkhibri and Fadzlan (2007) IB in Malaysia behaving under monopolistic competion o Cervik and Charap (2011) find that conventional bank depos rates and PLS rate of returns exhib long-run cointegration o Beck, et al. (2010) find that there are few significant differences in business orientation, efficiency, asset qualy or stabily between conventional and retail Islamic banks o Haron (2001) find similar posive relationship behavior of prof rate declared by Islamic banks and conventional banks 2/23/

9 Data and Methodology 2/23/ The data o The banking data set is obtained from the Bankscope database of Bureau van Dijk s o A panel of annual bank level data of all Islamic banks operating in the Malaysia covering the period o The macroeconomic variables: CPI, GDP, BFR and monetary policy rate are taken from Quarterly Statistical Bulletin by Central Bank of Malaysia o The sample consists of 17 instutions depending on the year wh the unbalanced panel observations 2/23/

10 Data descriptions Table 1: Descriptive Statistics Variable # of Obs. Mean Std. Dev. Min Max Financing Assets Liquidy Capal GDP Base Financing Rate Overnight Rate Prices Note: Financing, Assets, GDP and Prices are in logarhmic forms; Liquidy is defined as a ratio of liquid assets (cash and short-term funds) to total assets; Capal is defined as ratio of capal and reserve to total assets. Source: author s own computation from Bankscope 2/23/ Empirical strategy o Baseline Model: FIN l j 1 l i j j j 1 l j 1 BFR BFR BFR j t j t j t j * SIZE SIZE 1 0 * CAPITAL l j BFR j l j 1 LIQUIDITY j 0 t j GDP t 1 l j 1 1 * LIQUIDITY j CAPITAL 0 1 PRICES t 1 1 i i, t Bank Financing Rate interaction wh bank-specific characteristic Macro-variables (demand control) Individual bank characteristics Further test - conventional interest rate may influence the Islamic bank financing behaviour by including monetary policy rate 2/23/

11 The choice of bank-specific characteristics o Three measures for bank characteristics size (SIZE), liquidy (LIQUIDITY) and capalization (CAPITAL): Size: SIZE Liquidy: Capalisation: ln A N i ln A 1 N LA LIQUIDITY A CAPITAL T LA / A N T N T i 1 / t 1 N T K i 1 / A t 1 T K / A T N T The assumption is that small, less liquid and poorly capalised banks react more strongly to changes in base financing rate 2/23/ The Results 2/23/

12 Results Estimation (1) 2/23/ Results Estimation (2) 2/23/

13 Results Estimation (3) 2/23/ Results Impact of bank characteristics (1) o Negative direct impact of changes in the base financing rate on bank financing in line wh the basic theoretical prediction is similar to the bank lending channel of the conventional bank o The important of bank-specific characteristics. The variable of SIZE is posive that size is an important factor characterising the banks financing reaction wh large banks are expected to minimizing cost. o LIQUIDITY is posively associated bank financing that Islamic banks are able to protect their financing portfolios by drawing down on their liquid assets and are therefore, less likely to cut on financing o CAPITAL, appears that bank financing is posively associated wh bank capalization or the bank capal structure that market participants may perceive highly capalized banks as being less risky 2/23/

14 Results Impact of bank characteristics (2) o The macroeconomic variables included in the bank financing models to control for the demand-side effect, and only the real GDP growth variable is significant in the equation o The results wh overnight policy rate that the reaction of banks to changes in interest rates similar to base financing rate. The results are robust to a different type of econometric specifications o The evidence explains that the bulk of Islamic bank financing is based eher on the mark-up principle and is very debt-like in nature (i.e. murabaha and ijarah) rather than using the principle of PLS. o Islamic bank seems to face asymmetric information, severe adverse selection and moral hazard problems similar to their counterpart in their attempts to provide funds to entrepreneurs 2/23/ Conclusions 2/23/

15 Conclusion o The evidence suggests that the bank-specific characteristics are important for Islamic banking financing behaviour. o The Islamic banks financing behaviour is consistent wh behaviour of conventional banks that the bank lending operates via banks wh the level of size, liquidy and capal o The results also suggest that Islamic banks financing reacted to changes in interest rates o Due to the existence of moral hazard and adverse selection in the industry, Islamic bank is not able to provide a full-fledge alternative finance to conventional finance o Although is very challenging, would be a good idea if Islamic banks gradually move away from concentrating in the debt-based instruments and mark-up models. 2/23/ Thank You 2/23/