<![CDATA[Purpose – This study examines the effectiveness of conventional and Islamic monetary policy transmission in promoting MSME financing in Indonesia and Malaysia. It analyzes both financing channels, the contribution of monetary and macroeconomic variables, and their effectiveness across the two banking systems.Methodology – Quarterly data for Indonesia and Malaysia from 2014Q2 to 2025Q4 were analyzed using a vector error correction model (VECM), complemented by Granger causality, impulse response function (IRF), and forecast error variance decomposition (FEVD). The variables include the policy rate, M2, conventional credit, Islamic financing, investment, and GDP.Findings – Indonesia relies more on the conventional credit channel, which shows a stable response to monetary and macroeconomic shocks. Malaysia demonstrates more balanced transmission between conventional and Islamic channels, with Islamic financing showing stronger real-sector linkages. Transmission effectiveness has two complementary dimensions: IRF indicates that Indonesia’s conventional channel is more effective in response stability, whereas FEVD shows that Islamic financing is more sensitive to monetary shocks. Malaysia exhibits balanced and complementary transmission across both channels.Implications – Indonesia should strengthen Islamic financing through deeper Islamic money markets, improved monetary instruments, and stronger MSME bank intermediation. Malaysia should maintain the integration of both channels to support inclusive and sustainable MSME financing. The findings are limited to Indonesia and Malaysia and may not be generalizable to other dual banking systems.Originality – This study introduces a two-dimensional perspective on monetary transmission effectiveness by jointly interpreting IRF and FEVD, demonstrating that response stability and shock contribution provide complementary measures of effectiveness in dual banking systems.]]>
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