Islamic finance, contagion effects, spillovers and monetary policy

Abstract

Purpose

The aim of this paper is to review monetary and systemic liquidity management policies that essentially aim at containing crisis and limiting their spread. A corollary is whether relevant public authorities and market participants have tools at their disposal to deal with a systemic crisis affecting Institution Offering Islamic Financial Services (IIFS).

Design/methodology/approach

The method used in this study is an examination of existing literature. This paper considers mechanisms that may help contain a crisis and those that may foster post crisis recovery in the case of conventional and Islamic finance.

Findings

The progress made to date to develop money markets accessible to IIFS is commendable; however, it is not sufficient. Licensing IIFS in dual financial systems entails a public authority responsibility linked to the authorities’ accountability for the conduct of monetary policy and systemic liquidity management. Licensing an IIFS entails acknowledging the responsibility of being able to manage a system that includes IIFS. This is feasible and possible, but the issue needs to be addressed directly. In a crisis monetary policy and systemic liquidity management will be at the forefront of the stabilization efforts.

Originality/value

The experiences of Bahrain and Malaysia in developing a monetary policy and systemic liquidity management framework for their jurisdiction are assessed. The paper identifies also channels of potential spillover effects from conventional to Islamic finance.

Citation

Grais, W. and Rajhi, W. (2015), "Islamic finance, contagion effects, spillovers and monetary policy", Journal of Islamic Accounting and Business Research, Vol. 6 No. 2, pp. 208-221. https://doi.org/10.1108/JIABR-12-2012-0079