DefinePK

Abstract

Objective: This research investigates how monetary policy in Pakistan influences the credit supply of conventional and Islamic banks, with a particular focus on identifying variations in their responsiveness.
Research Gap: Although the transmission of monetary policy has been widely studied, few investigations have specifically compared its effects on Islamic and conventional banks in Pakistan, especially in relation to differences in bank size and liquidity.
Design/Methodology/Approach: Drawing on panel data from 2001 to 2024, the study utilizes the Generalized Method of Moments (GMM) estimation technique to evaluate the effects of monetary policy, categorizing banks by their size and liquidity characteristics.
The Main Findings: The findings reveal that monetary policy plays a significant role in shaping credit availability across both Islamic and conventional banks, with conventional institutions demonstrating a higher degree of sensitivity. Moreover, banks that are smaller in size or possess limited liquidity experience greater restrictions in credit provision during periods of monetary tightening. Credit supply is also affected by broader macroeconomic variables, including inflation and GDP growth.
Theoretical / Practical Implications of the Findings: This research comprehensively evaluates monetary policy's asymmetric effects on conventional and Islamic banks in Pakistan, offering novel insights for policymakers.
Originality/Value: The findings suggest the need for targeted monetary policy strategies to address liquidity concerns and enhance credit access, particularly for Islamic and small-scale banks.