ISLAMIC HOME FINANCING AND THE REAL SECTORS IN MALAYSIA: AN ARDL BOUND TESTING APPROACH TO COINTEGRATION
DOI:
https://doi.org/10.31436/ijema.v23i1.291Abstract
This study examines the dynamic relationship between macroeconomic variables (i.e., gross domestic product, house prices, stock prices, and interest rate) and home financing provided by Islamic banks in Malaysia. Using quarterly data from 2007 to 2014, this study employs autoregressive distributed lag (ARDL) bound testing cointegration approach, impulse response function (IRF), and forecast error variance decomposition (FEVD) to analyze the long-run and short-run relationships between selected macroeconomic variables and amount of Islamic home financing. This study finds that macroeconomic variables have distinct long-run and short-run influence on Islamic home financing. Our findings reveal that policy intervention to stimulate or dampen home financing provided by Islamic banks, in the long run, can focus on GDP, house prices, and monetary policy. This further underscores the link between the real sector of the economy and bank lending by Islamic banks. In addition, this study documents evidence that Islamic home financing in Malaysia, at least in the short run, is not dependent on interest rate and hence, calls for a potential alternative rate, possibly rental rate, that can be used as a benchmark rather than the current conventional interest rate. To a certain extent, the findings suggest that Islamic banks are non interest based and have managed to live up to their ideals in achieving the objectives of SharÄ«Ê¿ah (maqÄá¹£id alSharÄ«Ê¿ah) by promoting real sectors to increase Islamic home financing. This study is among the very few studies that empirically examine the nexus between Islamic home financing and real sector of the economy.
References
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Koop, G., M.H. Pesaran, and S.M. Potter. “Impulse Response Analysis in Nonlinear Multivariate Models.†Journal of Econometrics 74, no. 1 (1996): 119–47.
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Meera, A.K.M., and D. Abdul Razak. “Islamic Home Financing through Musharakah Mutanaqisah and al-BayʿBithaman Ajil Contracts: A Comparative Analysis.†Review of Islamic Economics 9, no. 2 (2005): 5–30.
Mendoza, E.G., and M.E. Terrones. “An Anatomy of Credit Booms: Evidence from Macro Aggregates and Micro Data.â€Working Paper No. 14049 National Bureau of Economic Research, 2008.
Narayan, P.K. “The Saving and Investment Nexus for China: Evidence from Cointegration Tests.†Applied Economics 37, no. 17 (2005): 1979–90.
Nurhanani, R., A.S.M. Ahmad, and F.M.Y. Mohd. “Volatility Analysis of FTSE Bursa Malaysia: Study of the Problems of Islamic Stock Market Speculation in the Period 2007 to 2010.†African Journal of Business Management 6, no. 29 (2012): 8490–95.
Pesaran, M.H., and Y. Shin. “Generalized Impulse Response Analysis in Linear Multivariate Models.†Economics Letters 58, no. 1 (1998): 17–29.
Pesaran, M.H., Y. Shin, and R.J. Smith. “Bounds Testing Approaches to the Analysis of Long Run Relationships.†Journal of Applied Econometrics 16, no. 3 (1999): 289–326.
Poterba, J. M. “Stock Market Wealth and Consumption.†The Journal of Economic Perspectives 14, no. 2 (2000): 99–118.
Schularick, M., and A.M. Taylor. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008. Working Paper No. 15512. National Bureau of Economic Research, 2009.
Sims, C. “Macroeconomics and Reality.†Econometrica 48 (1980): 1–48.
Starr-McCluer, M. “Stock Market Wealth and Consumer Spending.†Economic Inquiry 40, no. 1 (2002): 69–79.
Ahmad, A.R.Y. “Role of Finance in Achieving Maqasid al-Shariah.†Islamic Economic Studies 19, no. 2 (2009): 1–18.
Ahmed, H. “Maqasid Al-Shariah and Islamic Financial Products: A Framework for Assessment.†ISRA International Journal of Islamic Finance 3, no. 1 (2011): 149–60.
Ayub, Muhammad. Understanding Islamic Finance (Vol. 462). New
York: Wiley, 2007.
Beck, T., B. Büyükkarabacak, F. Rioja, and N. Valev. “Who Gets the Credit? And does it Matter? Household vs. Firm Lending across Countries.†The B.E. Journal of Macroeconomics 2, no. 1 (2012).
Bernanke, B.S., M. Gertler, and S. Gilchrist. “The Financial Accelerator and the Flight to Quality.†Working Paper No. 4789. National Bureau of Economic Research, 1994.
Bernanke, B.S., and A.S. Blinder. “Credit, Money, and Aggregate Demand.†Working Paper No. 2534. National Bureau of
Economic Research Cambridge, MA, USA, 1988.
Bernanke, B.S., and M. Gertler. “Inside the Black Box: The Credit Channel of Monetary Policy Transmission.†Working Paper No. 5146. National Bureau of Economic Research, 1995.
Bernanke, B.S., M. Gertler, and S. Gilchrist. “The Financial Accelerator in a Quantitative Business Cycle Framework.†Handbook of Macroeconomics 1 (1999): 1341–93.
Bianco, K. M. The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown. CCH, Wolters Kluwer Law and Business, 2008.
Borio, C.E., and P.W. Lowe. “Asset Prices, Financial and Monetary Stability: Exploring the Nexus.†Bank for International Settlements Press and Communications CH-4002 Basel, Switzerland, 2002.
BNM Monthly Statistical Bulletin. Retrieved from http://www.bnm.gov.my/index.phpch=en_publication_catalogue&pg=en_publication_msb&mth=3&yr=2015&lang=en&eId=box1.
BNM. Financial Stability and Payment Systems Report 2013. Kuala
Lumpur: Bank Negara Malaysia, 2014.
Brissimis, S.N., and T. Vlassopoulos. “The Interaction Between Mortgage Financing and Housing Prices in Greece.†The Journal of Real Estate Finance and Economics 39, no. 2 (2009): 146–64.
Calza, A., C. Gartner,and J. Sousa. “Modeling the Demand for Loans
to the Private Sector in the Euro Area.†Applied Economics 35, no. 1 (2001): 107–17.
Case, B., H.O. Pollakowski, and S.M. Wachter. “On Choosing among House Price Index Methodologies.†Real Estate Economics 19, no. 3 (1991): 286–307.
Case, K.E., J.M. Quigley, and R.J. Shiller. “Comparing Wealth Effects: The Stock Market versus the Housing Market.†Advances in Macroeconomics 5, no. 1 (2005): 1–32.
Chong, B.S., and M.-H. Liu. “Islamic Banking: Interest-free or Interest-based?†Pacific-Basin Finance Journal 17, no. 1 (2009): 125–44.
Crotty, J. “Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’.†Cambridge Journal of Economics 33, no. 4 (2009): 563–80.
El-Gamal, Mahmoud. Islamic Finance: Law, Economics, and Practice. New York: Cambridge University Press, 2006.
Engle, R.F., and C.W.J. Granger. “Cointegration and Error Correction: Representation, Estimation And Testing.†Econometrica 55, no. 2(1987): 251–76.
Fase, M.M. “The Demand for Commercial Bank Loans and the Lending Rate.†European Economic Review 39, no. 1 (1995): 99–115.
Fitzpatrick, T., and K. McQuinn. “House Prices and Mortgage Credit: Empirical Evidence for Ireland.†The Manchester School 75, no. 1 (2007): 82–103.
Gerlach, S., and W. Peng. “Bank Lending and Property Prices in Hong Kong.†Journal of Banking and Finance 29, no. 2, (2005): 461–81.
Hofmann, B. “The Determinants of Bank Credit in Industrialized Countries: Do Property Prices Matter?†International Finance 7, no. 2 (2004): 203–34.
Ibrahim, M.H. “Stock Prices and Bank Loan Dynamics in a Developing Country: The Case of Malaysia.†Journal of Applied Economics 9, no. 1 (2006): 71–89.
Jickling, M. Causes of the Financial Crisis. CRS Report for Congress. Congressional Research Service, 2009.
Johansen, S. “Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian vector Autoregressive Models.†Econometrica 55 (1991): 251–76.
Kassim, S. H., M.S.A. Majid, and R.M. Yusof. “Impact of Monetary Policy Shocks on the Conventional and Islamic Banks in a Dual Banking System: Evidence from Malaysia.†Journal of Economic Cooperation and Development 30, no. 1 (2009):41–58.
Khan, Irina. “Critical Issues with Shariah Screening Criteria.†Islamic Finance News. October 1, 2012.
Khoon, G.S., and M.L. Mah-Hui. The Impact of the Global Financial Crisis: The Case of Malaysia. Sungai Pinang: Third World Network, 2010.
Kim, S. B., and R. Moreno. “Stock Prices and Bank Lending Behavior in Japan.†Economic Review 1 (1994): 31–42.
Koop, G., M.H. Pesaran, and S.M. Potter. “Impulse Response Analysis in Nonlinear Multivariate Models.†Journal of Econometrics 74, no. 1 (1996): 119–47.
Lim, M.-H., and S.-K. Goh. How Malaysia Weathered the Financial Crisis: Policies and Possible Lessons. How to Prevent the Next Crisis: Lessons from Country Experiences of The Global Financial Crisis. The North-South Institute, 2012.
Maslow, Abraham. Motivation and Personality. New York: Harper and Row, 1954.
McKibbin, W.J., and A. Stoeckel. “The Global Financial Crisis:Causes and Consequences.†Asian Economic Papers 9, no. 1 (2010): 54–86.
Meera, A.K.M., and D. Abdul Razak. “Islamic Home Financing through Musharakah Mutanaqisah and al-BayʿBithaman Ajil Contracts: A Comparative Analysis.†Review of Islamic Economics 9, no. 2 (2005): 5–30.
Mendoza, E.G., and M.E. Terrones. “An Anatomy of Credit Booms: Evidence from Macro Aggregates and Micro Data.â€Working Paper No. 14049 National Bureau of Economic Research, 2008.
Narayan, P.K. “The Saving and Investment Nexus for China: Evidence from Cointegration Tests.†Applied Economics 37, no. 17 (2005): 1979–90.
Nurhanani, R., A.S.M. Ahmad, and F.M.Y. Mohd. “Volatility Analysis of FTSE Bursa Malaysia: Study of the Problems of Islamic Stock Market Speculation in the Period 2007 to 2010.†African Journal of Business Management 6, no. 29 (2012): 8490–95.
Pesaran, M.H., and Y. Shin. “Generalized Impulse Response Analysis in Linear Multivariate Models.†Economics Letters 58, no. 1 (1998): 17–29.
Pesaran, M.H., Y. Shin, and R.J. Smith. “Bounds Testing Approaches to the Analysis of Long Run Relationships.†Journal of Applied Econometrics 16, no. 3 (1999): 289–326.
Poterba, J. M. “Stock Market Wealth and Consumption.†The Journal of Economic Perspectives 14, no. 2 (2000): 99–118.
Schularick, M., and A.M. Taylor. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008. Working Paper No. 15512. National Bureau of Economic Research, 2009.
Sims, C. “Macroeconomics and Reality.†Econometrica 48 (1980): 1–48.
Starr-McCluer, M. “Stock Market Wealth and Consumer Spending.†Economic Inquiry 40, no. 1 (2002): 69–79.
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Published
2015-06-01
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Yusof, R. M., & Usman, F. H. (2015). ISLAMIC HOME FINANCING AND THE REAL SECTORS IN MALAYSIA: AN ARDL BOUND TESTING APPROACH TO COINTEGRATION. International Journal of Economics, Management and Accounting, 23(1). https://doi.org/10.31436/ijema.v23i1.291
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