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The vulnerability of Islamic bank’s credit risk to oil price shocks: evidence from Malaysia based on ARDL approach

Author

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  • Rahman, Syarifah
  • Masih, Mansur

Abstract

Credit risk analysis is a key to a better financial risk management. This issue has been the primary focus of financial and banking industry since loans are the largest and most prominent source of credit risk. Unlike the conventional banking, there is a lack of empirical study on credit risk about Islamic banking. As such, further research regarding the vulnerability of the Islamic banking industry has become vital. Accordingly, this paper is aimed at determining and assessing the long run vulnerabilities of Malaysian Islamic banks in term of its response to the shocks of the price of crude oil. The fall in oil prices is believed to have an impact on loans’ repayment. Additionally, the selected key macroeconomic variables used in this study will be used as controlled variables so that the model will not be spurious. The autoregressive distributed lag (ARDL) methodology is employed to test this relationship, controlling for information in other financial and economic indicators. Based on the result of variance decompositions (VDCs) and impulse response function (IRF), it is found that, sufficient evidence of a long-run relationship exists between credit risk ratio in Islamic banking industry and the selected macroeconomic variables. The results tend to indicate that oil price shocks are an endogenous variable in the short-run dynamics, and the ranking provided byVDCs indicates that oil price shocks are least likely to have affected the Non-performing financing (NPF) ratio of Islamic banks as it is ranked at 6th place.

Suggested Citation

  • Rahman, Syarifah & Masih, Mansur, 2018. "The vulnerability of Islamic bank’s credit risk to oil price shocks: evidence from Malaysia based on ARDL approach," MPRA Paper 106776, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106776
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    References listed on IDEAS

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    More about this item

    Keywords

    Islamic banks; Non-performing financing (NPF); oil price; ARDL; VDC; Malaysia;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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