THE IMPACT OF MACROECONOMIC VARIABLES ON ISLAMIC BANKS FINANCING IN MALAYSIA

Abstract

The study investigates the impact of conventional bank interest rate on the volume of financing of Islamic banks in Malaysia for the period spanning 2006:12 to 2011:3. Omitted variable bias is provided for, by including several control variables such as production index, real effective exchange rate, price index and stock market index as additional explanatory variables. The relationship among the variables is examined with the ARDL approach to cointegration. Findings suggest the existence of one long run relationship among the variables. Furthermore, the study shows that interest rate significantly affects Islamic banks financing Malaysia. This is taken to mean that Islamic banks financing is complementary rather than substitute to conventional banks financing. Hence, it is recommended that Islamic banks in Malaysia should accommodate more profit and loss products in order to be more interest-free.

Keywords: Islamic banks financing, ARDL, Granger causality test.