Naveed AslamFollow

Degree

Master of Science in Islamic Banking & Finance

Department

Department of Finance

Faculty/ School

Faculty of Business Administration (FBA)

Date of Submission

Fall 2021

Supervisor

Dr. Ashraf Khan, Assistant Professor, Department of Finance, Institute of Business Administration (IBA), Karachi

Abstract

In the aftermath of global financial crisis of 2008, the central banks developed and deployed Macro-Prudential Policy (MPP) tools for protecting the financial system. MPP ensured the financial stability by influencing the risk taking behavior of financial institutions. Later, researchers raised questions over the impact of MPP on transmission mechanism of Monetary Policy (MP) which targeted inflation/employment. The literature on this issue transpired that MPP may impact the monetary policy transmission in a positive or negative way by controlling the risk taking channel. In this paper, the influence of monetary policy variables over the risk-taking behavior of overall banking industry and Islamic Banking Institutions (IBI) was examined in the presence of macro-prudential policy variables.

The period of study was 2012-2020 when the monetary policy rates hit the lowest rates of 6.25% and then surged to peak in 2019 to 13.5%. Results transpired that expansionary monetary policy did not trigger the risk taking behavior but rather had a positive relationship with risk taking variable of loans to deposits both in overall banking industry and IBIs. This signifies a strong macro-prudential policy influence over risk taking in Pakistan. Though, the risk taking of IBIs was relatively higher, however, the credit risk management was better in IBIs as portrayed by lower non-performing financing rate.

Document Type

Restricted Access

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