MONETARY POLICY SHOCKS AND ISLAMIC BANKS DEPOSITS IN INDONESIAN DUAL BANKING SYSTEM AFTER
THE FINANCIAL CRISIS
Department of Islamic Economic Tazkia Business School
Jl. Raya Darmaga Km.7 Bogor, Indonesia
Business Development Analyst
International Finance Corporation
Use of riba (usury) in the economic system remained a key factor that led to financial crisis since the inception of modern economy in the late of 17th century. Implementation of interest based monetary policy stipulated rampant speculation as common practices in the global financial sector. Although Islamic banking was governed by sharia (Divine Law), which was assumed to be resilient from distress, the volatility of interest movement would generally affect Islamic banks operations in a dual banking system. This paper would look at this issue and would empirically explore the dynamic inter-relationships between deposits of Islamic banks with monetary policy variables in Indonesia. In terms of market share, as of 2009, Islamic banking asset in Indonesia was a meager 2%. The industry had been affected by few monetary policy shocks on its deposits and financing. The study would employ vector auto regression model (VAR) to explore the dynamics between the variables. The study would focus on data from 2004 to 2008 or performance after the Asian financial crisis. The results from these tests determined that sharia based deposits played significant role in transmitting monetary policy effects to the economy. This study found that Islamic banking deposits in Indonesia were not sensitive to monetary policy changes. This study also concluded that Indonesian Islamic banks were resilient to financial crisis.
Key words: monetary policy, Islamic Banks, conventional banks