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Islamic Endogenous Money: Evidence From The Islamic Banking System In Indonesia And Malaysia

Author

Listed:
  • Khoirul Umam

    (Universitas Darussalam Gontor, Indonesia)

  • Abdul Ghafar Ismail

    (Universiti Sains Islam Malaysia, Malaysia)

  • Jaka Sriyana

    (Universitas Islam Indonesia, Indonesia)

Abstract

This paper proposes a theoretical model of endogenous Islamic money and empirically analyses the endogeneity of Islamic money supply under fiat and fractional reserve systems. The causal relations between Islamic money and macro and financial variables are assessed using the autoregressive distributed lag (ARDL) model and error-correction modelling (ECM). The results suggest that the greater the maturity and the larger the asset share in the Islamic financial system, the better the endogeneity of money. They also reveal that the profit and loss sharing system can connect the economy to money, minimise the exogenous potential of the fractional reserve requirement system, and eliminate the exogenous feature of the fiat money system. Accordingly, the study argues that an Islamic endogenous money system can be developed in fiat and fractional reserve banking systems.

Suggested Citation

  • Khoirul Umam & Abdul Ghafar Ismail & Jaka Sriyana, 2021. "Islamic Endogenous Money: Evidence From The Islamic Banking System In Indonesia And Malaysia," Journal of Islamic Monetary Economics and Finance, Bank Indonesia, vol. 7(3), pages 545-560, August.
    • Handle: RePEc:idn:jimfjn:v:7:y:2021:i:3f:p:545-560
    DOI: https://doi.org/10.21098/jimf.v7i3.1351
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    More about this item

    Keywords

    Endogenous Islamic money; Islamic M2; Indonesian Islamic banks; Malaysian Islamic banks;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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