The causal relationship between islamic bank financing and macroeconomic variables: evidence from Malaysia based on ARDL approach

The paper attempts to study the relationship between Islamic financing and interest rate, stock price and real economic production as the macroeconomic variables for Islamic Banking system in Malaysia using the ARDL. Using this technique and methodology, we try to measure the long run relationships among these variables. Despite the abundant literature on bank lending, interest rate, GDP and stock price in many developing countries, there is relatively less empirical work on this subject in Malaysia. Most of the theories or earlier studies available are focusing more on conventional banking and very limited for Islamic financing perspective. The results show there is a significant causal relationship of interest rate with Islamic financing, medium result with stock price and very low result with real production. This shows that Islamic financing in Malaysia is robust enough to thrive during the good/bad economic condition with regard to the stock price or real industrial productivity. However, Islamic banks are not freed from the fluctuations in interest rate of the country. As such, the policy makers by controlling the interest rate may provide the stability in terms of Islamic banking financing in the market.