Is the interest rate pass-through to retail rates relatively complete for Islamic banks compared to conventional banks in Pakistan?

Purpose The efficacy of monetary policy largely depends on the size and speed of interest rate pass-through on the lending and deposit rates offered by commercial banks. Islamic banks with a share of roughly 20 % of the total assets of the banking system in Pakistan, operate differently than conventional banks. The purpose of this study is to analyze whether the interest rate pass-through to deposit and lending rates is relatively complete for Islamic banks compared with conventional banks in Pakistan. Design/methodology/approach The autoregressive distributed lag model and the bounds test are used on a monthly data from 2005 to 2024 to estimate the short- and long-run coefficients along with the coefficient of speed of adjustment for both Islamic and conventional banks operating in Pakistan. Findings The results indicate that the interest rate pass-through is more complete and quicker for both the deposit and lending rates of Islamic banks than for conventional banks. The findings of this study contribute to the literature by highlighting the differences in how Islamic and conventional banks in Pakistan respond to monetary policy changes. Originality/value The pass-through of interest rates to retail rates is estimated for the overall banking industry of Pakistan or in terms of ownership (for instance privately owned or publicly owned). This is a novel step in which disaggregated data of conventional and Islamic banks are used to estimate the short run, long run and speed of adjustment coefficients to observe the efficacy of the monetary policy transmission mechanism of Islamic banks vis-à-vis conventional banks in Pakistan.