On the role of Islamic banks in the monetary policy transmission in Saudi Arabia

Abstract

Even though a significant strand of the literature has examined the transmission mechanisms of monetary policy in a conventional framework, very little research has directly addressed the role of Islamic banks in this transmission. Using a TVP-VAR model with stochastic volatilities, this paper attempts to fill this gap in the literature by examining the monetary policy transmission in Saudi Arabia, as well as the role of Islamic banks in this transmission over a period of approximately 25 years. Although Islamic banking is, in theory, different from conventional banking, our results provide robust evidence of the dependence of Islamic banking activity on oil revenues, and suggest that, in practice, there are few differences between the Islamic banks’ modus operandi and the methods used by conventional banks. However, the results do not provide clear evidence that Islamic banks are more stabilizing than conventional banks, even though the sensitivity of the non-oil economic activity to Islamic bank financing seems to be relatively less volatile than its sensitivity to conventional bank credits.

Appendices

Appendix 1: NCB: the first Saudi commercial bank

Despite the fact that the NCB started operating in 1953, its foundations date back to 1937. Indeed, in 1937 the Mahfouz and Musa Kaki families, who were the largest money changers, asked King Abdelaziz Ibn Saud for permission to establish the first Saudi commercial bank. A year later (1938) the Kaki Salah Company was established in Jeddah and was owned by the Mahfouz (51.5%) and Musa Kaki (48.5%) families. Over time, the share of the Mahfouz family in the capital of NCB increased at the expense of the share of the Musa Kaki family which became even more minor. In 1988, Salim Ben Mahfouz passed the control of the bank to his son Khaled. But this transfer of control was disastrous for the bank. Indeed, the NCB failed to produce financial statements for the years 1990 and 1991 (Ramady, 2009). In 1997, Saudi police and intelligence agencies obtained evidence of Khaled's involvement in suspicious fund transfers (in the form of religious charities). In the same year (1997), Khaled was stripped of his Saudi nationality while abroad and SAMA intervened to introduce major changes in the organization and management of the NCB³³: it became a joint stock company and a new board of directors was appointed, from which the Ben Mahfouz family was excluded. In 1999, the Public Investment Fund, a fund belonging to the Ministry of Finance, acquired 50% of the bank's shares, making it a semi-public entity. In 2006, the Fund's share in NCB's capital increased to 80%.

Appendix 2: Posterior estimates for (1) stochastic volatility of the structural shock ${\upsigma }_{{{\text{it}}}}$ and (2) simultaneous relation ${\tilde{\text{a}}}_{{{\text{it}}}}$ [Model 1]

Fig. 8

Posterior estimates for (1) stochastic volatility of the structural shock ${{\varvec{\upsigma}}}_{{{\mathbf{it}}}}$ and (2) simultaneous relation ${\tilde{\mathbf{a}}}_{{{\mathbf{it}}}}$ [Model 1] (color figure online)

Appendix 3: Impulse responses of TVP-VAR model for the variable set of Model 1

Fig. 9

Impulse responses of TVP-VAR model for the variable set of (P, GDP, M, T3MAS, OP) (color figure online)

Appendix 4: Posterior estimates for stochastic volatility of the structural shock ${\upsigma }_{{{\text{it}}}}$ [Models 2 and 3]

Fig. 10

Posterior estimates for stochastic volatility of the structural shock ${{\varvec{\upsigma}}}_{{{\mathbf{it}}}}$ [Models 2 and 3] (color figure online)

Appendix 5: Posterior estimates for simultaneous relation ${\tilde{\text{a}}}_{{{\text{it}}}}$ [Models 2 and 3]

Fig. 11

Posterior estimates for simultaneous relation ${\tilde{\mathbf{a}}}_{{{\mathbf{it}}}}$ [Models 2 and 3] (color figure online)

Appendix 6: Impulse responses of TVP-VAR models 2 and 3

Fig. 12

Impulse responses of TVP-VAR models 2 and 3 (color figure online)