Macroprudential Regulation and Policy for the Islamic Financial Industry

Chapter 3 Conceptual Proposal for Future Macroprudential Framework Undera Dual Financial System in Indonesia

Ascarya , Adiwarman A. Karim , Siti Rahmawati , Masyhudi Muqorrobin ,and Dimas Bagus Wiranatakusuma

Abstract The chapter focuses on analyzing the risks exposed in Islamic banks and proposes criteria to design and implement macroprudential policy under dual financial system in Indonesia. Under this financial system, Islamic bank’s risks are among the primary concern due to the common and unique risks exposed. The study uses gap analysis to analyze the macroprudential design. The study suggests redefining on two main aspects: (a) objective and role of central bank and (b) objective, scope,instrument, and authority of macroprudential policy. Therefore, some preconditions need to be in place toward achieving effective macroprudential framework under dual systems such as institutional, instruments, and related arrangements in order top reserve financial system stability.

Chapter 8 Testing of the Procyclicality of Islamic and Conventional Banks in Indonesia

Ascarya, Siti Rahmawati, and Adiwarman A. Karim

Abstract Procyclicality of banking system is believed to be one of the important sources of financial system systemic instability which could be addressed by macroprudential policy. This study aims to test procyclicality of Islamic and conventional banks in Indonesia using several quantitative methods in developing Islamic macroprudential policy. The study shows that as growth increases, growth of Islamic financing increases more than the increase of conventional loan. It implies that Islamic bank is more procyclical than conventional bank. The study also shows that procyclicality of Islamic bank does not create credit bubbles, so that it can be classified as good procyclicality, which can be beneficial to long term economic growth. On the contrary, procyclicality of conventional bank does create bubbles, so that it can be categorized as bad procyclicality. Taking into account Islamic bank has inherent stability and has closer link to the real sector, therefore measures for Islamic macroprudential should be more flexible than those for conventional macroprudential.

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