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Impact of financial shocks on Islamic banks: Malaysian evidence during 1997 and 2007 financial crises

Author

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  • Salina H. Kassim
  • M. Shabri Abd. Majid

Abstract

Purpose - The purpose of this paper is to provide empirical evidences on the impact of financial shocks on the Islamic banks Design/methodology/approach - Focusing on the Malaysian data covering three sub-periods, namely, the 1997 Asian financial crisis period (July 1997-September 1999), the non-crisis period (October 1999-June 2007) and the 2007 financial crisis period (July 2007-September 2009), the study employs the impulse response functions and variance decomposition analysis based on the vector auto-regression (VAR) method. Findings - The results indicate that both the Islamic and conventional banking systems are vulnerable to financial shocks. This is contrary to the popular belief that the Islamic financial system is sheltered from the financial shocks due to its interest-free nature. Research limitations/implications - The results of this study have important implications for the risk management practices of both the Islamic and conventional banks. Originality/value - This paper contributes in providing the empirical evidence on the impact of financial shocks on the Islamic banks. To the authors' knowledge, there have been no studies comparing of the impacts of the two major financial crises on the Islamic banking sector.

Suggested Citation

  • Salina H. Kassim & M. Shabri Abd. Majid, 2010. "Impact of financial shocks on Islamic banks: Malaysian evidence during 1997 and 2007 financial crises," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 3(4), pages 291-305, November.
  • Handle: RePEc:eme:imefpp:v:3:y:2010:i:4:p:291-305
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    References listed on IDEAS

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    1. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 2-16.
    2. Mosconi, Rocco & Giannini, Carlo, 1992. "Non-causality in Cointegrated Systems: Representation Estimation and Testing," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 399-417, August.
    3. Mansor H. Ibrahim, 2005. "Sectoral Effects of Monetary Policy: Evidence from Malaysia," Asian Economic Journal, East Asian Economic Association, vol. 19(1), pages 83-102, March.
    4. MArdi Dungey & Renee Fry & Brenda Gonzales-Hermosillo & Vance L. Martin & Chrismin Tang, 2008. "Are Financial Crises Alike?," CAMA Working Papers 2008-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. Darrat, Ali F., 2002. "The relative efficiency of interest-free monetary system: some empirical evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(4), pages 747-764.
    6. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    7. Jang, Hoyoon & Sul, Wonsik, 2002. "The Asian financial crisis and the co-movement of Asian stock markets," Journal of Asian Economics, Elsevier, pages 94-104.
    8. MacDonald, Ronald & Kearney, Colm, 1987. "On the specification of granger-causality tests using the cointegration methodology," Economics Letters, Elsevier, vol. 25(2), pages 149-153.
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    Citations

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    Cited by:

    1. Mousa Almanaseer, 2014. "The Impact of the Financial Crisis on the Islamic Banks Profitability - Evidence from GCC," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(3), pages 176-187, July.
    2. repec:eee:quaeco:v:66:y:2017:i:c:p:212-224 is not listed on IDEAS
    3. repec:eee:pacfin:v:46:y:2017:i:pa:p:1-13 is not listed on IDEAS
    4. Rashidah Abdul Rahman & Siti Balqis Noor & Tariq Ismail, 2013. "Governance and Risk Management: Empirical Evidence from Malaysia and Egypt," International Journal of Finance & Banking Studies, Society for the Study of Business & Finance, pages 21-33.

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