Do Islamic banks lead or lag conventional banks? Evidence from Malaysia

Nor, Amirudin Mohd and Masih, Mansur (2017): Do Islamic banks lead or lag conventional banks? Evidence from Malaysia.

Abstract

This paper explores the causal relationship between Islamic banks’ non-performing financing (NPF) and conventional banks’ non-performing loans (NPL) for the banking industry in Malaysia. To further understand these asset quality variables, we added domestic macroeconomic variables namely domestic credit, real lending rate and exchange rate for the period January 2007 to January 2017. Using time series cointegrating VAR models, coupled with the Long Run Structural Modelling (LRSM), Vector Error Correction Model (VECM) and Variance Decompositions (VDC), the results tend to suggest that NPF leads NPL. Contrary to expectation, the VDC results suggest that NPF and NPL variables are leading and lagging respectively. This unexpected result gives rise to many interesting arguments especially within the Islamic banking perspectives. Apart from providing important insights into the causality between NPF and NPL, our results contribute to the policy implications. Interest rate variable being the most leading variable may be used to affect both NPFs and NPLs.

• Item Type: MPRA Paper
• Language: English
• Keywords: non-performing financing, non-performing loans, causality, LRSM
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Abid, L., Ouertani, M. N., & Zouari-Ghorbel, S. (2014). Macroeconomic and Bank-specific Determinants of Household’s Non-performing Loans in Tunisia: A Dynamic Panel Data. Procedia Economics and Finance, 13 December 2013, 58–68.

Anuar, K., & Mohamad, S. (2014). Are Deposit and Investment Accounts in Islamic Banks in Malaysia Interest Free ? JKAU: Islamic Econ., 27(2), 27–55.

Bank Negara Malaysia. (2015). Classification and Impairment Provisions for Loans / Financing.

Beck, R., Jakubik, P., & Piloiu, A. (2015). Key Determinants of Non-performing Loans: New Evidence from a Global Sample. Open Economies Review, 26(3), 525–550.

Borio, C., & Lowe, P. (2002). Asset prices, financial and monetary stability: exploring the nexus. BIS Working Paper, (114), 47.

Borio, C., & Lowe, P. (2002). Asset prices , financial and monetary stability : exploring the nexus. BIS Working Papers, (114).

Chaibi, H., & Ftiti, Z. (2015). Research in International Business and Finance Credit risk determinants : Evidence from a cross-country study. Research in International Business and Finance, 33, 1–16.

Dimitrios, A., Helen, L., & Mike, T. (2016). Determinants of non-performing loans : Evidence from Euro-area countries. Finance Research Letters, 18, 116–119.

Florin, B. (2015). The quality of bank loans within the framework of globalization. Procedia Economics and Finance, 20(15), 208–217.

Fofack, H. L. (2005). Nonperforming loans in Sub-Saharan Africa : Causal analysis and macroeconomic implications. Working Paper of World Bank Policy Research, (WPS3769), 1–36.

Ghosh, A. (2015). Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states. Journal of Financial Stability, 20, 93–104.

Gujarati, D. N. (2004). Basic Econometrics. New York. The McGraw- Hill Companies.

Hasan, M., & Dridi, J. (2010). The Effects of the Global Crisis on Islamic and Conventional Banks : A Comparative Study. IMF Working Paper, WP/10/201.

Kavkler, A., Repina, S., & Festic, M. (2011). The macroeconomic sources of systemic risk in the banking sectors of five new EU member states, 35, 310–322.

Klein, N. (2013). Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance. IMF Working Papers, 13(72), 1.

Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking and Finance, 36(4), 1012–1027.

Masih, M., Al-Sahlawi, M. A., & Mello, L. De. (2010). What drives carbon-dioxide emissions: income or electricity generation? evidence from saudi arabia, Journal of Energy and Development, 33(2), 201-213.

Pesaran, H., & Shin, Y. (2002). Long-Run Structural Modelling, Econometric Reviews, 21(1), 49-87.