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The impact of interest rate changes on islamic home financing: Malaysia as a case study

Norhaziah Hashim and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigated the impact of interest rate changes, specifically the base lending rate (BLR) on the demand for Islamic home financing in a dual banking system. Malaysia is taken as a case study. Theoretically, any increase in the interest rate (base lending rate), would lead customers who are guided by the profit motive to substitute Islamic home financing for conventional bank home loans and vice versa. Using a 109 monthly data series covering ten years, the study found that an increase in the base lending rate would trigger customers to obtain financing from Islamic banks. Conversely, any decrease in the base lending rate would induce customers to shift to the conventional home loans. The paper concludes that because customers are profit motivated, Islamic banks in the dual banking system, such as in Malaysia are exposed to interest rate risks despite operating on an interest free principle.

Keywords: Islamic financing; Bai-Bithaman Ajil; interest rates; base lending rates; Malaysia (search for similar items in EconPapers)
JEL-codes: C22 C58 E44 G21 (search for similar items in EconPapers)
Date: 2018-06-30
New Economics Papers: this item is included in nep-isf, nep-mac and nep-sea
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