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Can the islamic banks’ credit risk be explained by macroeconomic shocks? evidence from Malaysia

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Listed:
  • Rosle, Alia Nadira
  • 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 proxied by non-performing loan ratio (NPLR) in term of its response to the macroeconomic variables that include Consumer Price Index (CPI), Production Price Index (PPI), Real Interest Rate (INT), Exchange Rate (EXCH) and Money Supply. The study is conducted on monthly data covering eleven years starting from January 2007. Malaysia is used as a case study. The techniques employed in this study are based on Vector Error Correction Modeling (VECM) and Variance Decompositions (VDC). In this study we found that the non-performing loan ratio, interest rate and money supply were relatively exogenous variables. In particular, the non-performing loan ratio being the most exogenous can’t be explained by any macroeconomic shocks. The results have strong policy implications.

Suggested Citation

  • Rosle, Alia Nadira & Masih, Mansur, 2018. "Can the islamic banks’ credit risk be explained by macroeconomic shocks? evidence from Malaysia," MPRA Paper 107059, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107059
    as

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    References listed on IDEAS

    as
    1. Ivan Baboucek & Martin Jancar, 2005. "Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio," Working Papers 2005/01, Czech National Bank.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    3. Khan, Tariqullah & Ahmed, Habib, 2001. "Risk Management: An Analysis of Issues in Islamic Financial Industry (Occasional Paper)," Occasional Papers 2001, The Islamic Research and Teaching Institute (IRTI).
    4. Elgari, Mohamed Ali, 2003. "Credit Risk In Islamic Banking And Finance," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 10, pages 2-25.
    5. A. Mansur M. Masih & Trent Winduss, 2006. "Who Leads the Australian Interest Rates in the Short and Long Run? An Application of Long Run Structural Modelling," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 1-24.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Islamic banks; Non-performing loans; VECM; 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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