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Does the conventional benchmark prop up non-performing loans in Islamic banks? A case study of Malaysia with ARDL Approach

Shamsudheen, Shinaj Valangattil and Masih, Mansur (2015): Does the conventional benchmark prop up non-performing loans in Islamic banks? A case study of Malaysia with ARDL Approach.

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Abstract

Non-performing loan rate is one of the most significant issues for the banks to survive. The key motivation of this study is the profound statement that “Islamic banks are free from interest rates” and it is indeed to check the validity of this statement in the area of Non-performing loan rate. The principal objective of this study is to examine the short and long run impact of interest rate (KLIBOR) on Islamic bank’s Nonperforming loan rate. The methodology applied is ‘Auto – Regressive Distributive Lag’ model which has taken care of a major limitation of the conventional cointegrating tests in that they suffer from pre-test biases. Based on the above rigorous methodology, we try to measure both long- and short-run relationships between the interest Rate (KLIBOR) and the non-performing loan by using other controlling variables (loan growth rate unemployment rate, & industrial production index). This study may be considered significantly different from previous studies since to the best of our knowledge, there is no literature available that directly examines the impact of KLIBOR on non-performing loans in Islamic banks. From the detailed theoretical and literature study it is found that most of the theories related to Nonperforming loan rate connected with interest rate are not applicable to Islamic banking. The empirical findings show that the interest rate (KLIBOR) makes impact only in the short run and shows the insignificant impact in the long run. It is also found that there is no effect of crisis in the short and long run on Non-performing loans in this model.

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