Financial Stability: The Significance and Distinctiveness of Islamic Banking in Malaysia

Levy Economics Institute Working Paper No. 555

55 Pages Posted: 31 Jan 2009

See all articles by Ewa Karwowski

Ewa Karwowski

Kingston University - Economics; University of London

Date Written: January 30, 2009

Abstract

This paper explores the significance of Islamic banking in Malaysia for stability in the country's economy as a whole. Neither conventional theory nor Islamic economics puts forward a systematic explanation of financial intermediation; consequently, neither is capable of identifying destabilizing elements in the system. Instead, a flow-of-funds approach similar to Minsky's own is applied to the (post-) modern consumption-led) business cycle and financial (and asset) market.

Malaysia's structural current account surplus contributes to the overcapitalization of domestic firms. This in turn finances a financial (as opposed to an industrial), consumption-led (instead of investment-led) business cycle, where banking favors destabilizing asset price inflation. Islamic banks operating interdependently with conventional ones contribute to economic destabilization channeling surplus funds from the corporate to the household sector.

Keywords: Credit, Islamic Banking, Financial Stability

JEL Classification: E44, E32, P5, Z12

Suggested Citation

Karwowski, Ewa, Financial Stability: The Significance and Distinctiveness of Islamic Banking in Malaysia (January 30, 2009). Levy Economics Institute Working Paper No. 555. Available at SSRN: https://ssrn.com/abstract=1335286 or http://dx.doi.org/10.2139/ssrn.1335286

Ewa Karwowski (Contact Author)

Kingston University - Economics ( email )

United States

University of London ( email )

Senate House
Malet Street
London, WC1E 7HU
United Kingdom

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