Abstract
Banks earn interest income by borrowing
at low cost of interest from consumer/savers and lending at higher cost of
interest to companies that need resources for financing and investment. Thus,
providing liquidity and combining lending and liquidity
provision as a commitment mechanism become the main issue. Banks borrow from
and lend to each other via interbank lines of credit and on-lend to deficit
units in large amounts at interest rates that depend upon the maturity of the
loan and the credit worthiness of the borrower. In Malaysia, such market operates
based on Kuala Lumpur
interbank offered interest rates (Klibor). In 1994 an Islamic interbank money
market system (IIM) was introduced to meet the liquidity needs for the Islamic
financial institutions. This study is to investigate the long-run relationship
between overnight Klibor and overnight IIM rate. The results indicate no
long-run cointegration and both markets run independently.
Keywords: intermediation; liquidity; interest rates
and Islamic interbank
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