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A structural VAR analysis of Islamic financing in Malaysia

Author

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  • Mansor H. Ibrahim
  • Fadzlan Sufian

Abstract

Purpose - – The purpose of this paper is evaluate the interrelations between Islamic financing and key economic and financial variables including real output, price level, interest rate and stock prices for the case of Malaysia. Design/methodology/approach - – The paper makes use of a structural vector autoregressive (SVAR) model to discern the influences of key economic and financial variables on the behavior of Islamic financing. Findings - – The basic results indicate that Islamic financing responds positively to innovations in real output. In addition, the price level shocks also tend to have significant but lagged effects on the financing provision of Islamic banks. Most interestingly, Islamic financing is impacted negatively and immediately by positive interest rate shocks, contradicting the argument that Islamic bank operations are shielded from interest rate fluctuations. Indeed, the excess sensitivity of Islamic banks to interest rate fluctuations and their lagged responses to price level shocks are found to be robust across alternative SVAR specifications. Practical implications - – Operating under a dual banking system, Islamic banks are not immune from monetary conditions of the country. Indeed, it seems to be exposed to the interest rate risk, an aspect that needs to be accounted for by Islamic banks in their risk management. Originality/value - – With the emergence of Islamic finance industry, understanding the implications of various macroeconomic factors on Islamic financing is essential. This study adds to this understanding, which has received limited attention.

Suggested Citation

  • Mansor H. Ibrahim & Fadzlan Sufian, 2014. "A structural VAR analysis of Islamic financing in Malaysia," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 31(4), pages 371-386, September.
  • Handle: RePEc:eme:sefpps:v:31:y:2014:i:4:p:371-386
    DOI: 10.1108/SEF-05-2012-0060
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    Citations

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    Cited by:

    1. Seho, Mirzet & Alaaabed, Alaa & Masih, Mansur, 2016. "Risk-Sharing Financing of Islamic Banks: Better Shielded Against Interest Rate Risk?," MPRA Paper 82558, University Library of Munich, Germany.
    2. Lina Nugraha Rani & Eko Fajar Cahyono, 2018. "A Comparative Analysis between Islamic Banks and Conventional Banks in Indonesia Before and After Global Financial Crisis," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 64, pages 131-144, Desember.
    3. Ramic, Esma & Masih, Mansur, 2017. "Is islamic bank financing related to interest rate ? Malaysian evidence based on ARDL approach," MPRA Paper 107163, University Library of Munich, Germany.
    4. Šeho, Mirzet & Bacha, Obiyathulla Ismath & Smolo, Edib, 2020. "The effects of interest rate on Islamic bank financing instruments: Cross-country evidence from dual-banking systems," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    5. Chen, Naiwei & Liang, Hsin-Yu & Yu, Min-Teh, 2018. "Asset diversification and bank performance: Evidence from three Asian countries with a dual banking system," Pacific-Basin Finance Journal, Elsevier, vol. 52(C), pages 40-53.
    6. Salisu, Afees A. & Ndako, Umar B. & Adediran, Idris A. & Swaray, Raymond, 2020. "A fractional cointegration VAR analysis of Islamic stocks: A global perspective," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).

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