The vulnerability of Islamic bank’s credit risk to oil price shocks: evidence from Malaysia based on ARDL approach

Syarifah Rahman and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: Credit risk analysis is a key to a better financial risk management. This issue has been the primary focus of financial and banking industry since loans are the largest and most prominent source of credit risk. Unlike the conventional banking, there is a lack of empirical study on credit risk about Islamic banking. As such, further research regarding the vulnerability of the Islamic banking industry has become vital. Accordingly, this paper is aimed at determining and assessing the long run vulnerabilities of Malaysian Islamic banks in term of its response to the shocks of the price of crude oil. The fall in oil prices is believed to have an impact on loans’ repayment. Additionally, the selected key macroeconomic variables used in this study will be used as controlled variables so that the model will not be spurious. The autoregressive distributed lag (ARDL) methodology is employed to test this relationship, controlling for information in other financial and economic indicators. Based on the result of variance decompositions (VDCs) and impulse response function (IRF), it is found that, sufficient evidence of a long-run relationship exists between credit risk ratio in Islamic banking industry and the selected macroeconomic variables. The results tend to indicate that oil price shocks are an endogenous variable in the short-run dynamics, and the ranking provided byVDCs indicates that oil price shocks are least likely to have affected the Non-performing financing (NPF) ratio of Islamic banks as it is ranked at 6th place.

Keywords: Islamic banks; Non-performing financing (NPF); oil price; ARDL; VDC; Malaysia (search for similar items in EconPapers)
JEL-codes: C22 C58 G15 G21 (search for similar items in EconPapers)
Date: 2018-05-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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