Granger-causality between islamic banks and conventional banks: evidence from Malaysia

Amiruddin Nor and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: This paper explores the Granger-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. All variables are I(1) in nature on the basis Augmented Dicker Fuller (ADF) and Philips-Perron (PP) unit root test. Using time series cointegrating VAR models, coupled with the Long Run Structural Modelling (LRSM), Vector Error Correction Model (VECM) and Variance Decomposition (VDC), the results tend to suggest that NPF leads NPL. Contrary to expectation, the VDC results suggest that NPF and NPL variables are exogenous and endogenous respectively. This unexpected result gave 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 exogenous variable can affect both NPFs and NPLs. The CUSUM and CUSUMSQ tests substantiate the stability of the functions.

Keywords: Islamic banks; conventional banks; non-performing financing (NPF); non-performing loans (NPL); Granger-causality; Malaysia (search for similar items in EconPapers)
JEL-codes: C22 C58 E44 G21 (search for similar items in EconPapers)
Date: 2017-05-30
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/107064/1/MPRA_paper_107064.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:107064

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().