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Do Islamic banks lead or lag conventional banks? Evidence from Malaysia

Amirudin Mohd Nor and Abul Masih ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper explores the 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. Using time series cointegrating VAR models, coupled with the Long Run Structural Modelling (LRSM), Vector Error Correction Model (VECM) and Variance Decompositions (VDC), the results tend to suggest that NPF leads NPL. Contrary to expectation, the VDC results suggest that NPF and NPL variables are leading and lagging respectively. This unexpected result gives 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 leading variable may be used to affect both NPFs and NPLs.

Keywords: non-performing financing; non-performing loans; causality; LRSM (search for similar items in EconPapers)
JEL-codes: C58 E44 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm, nep-mac and nep-sea
Date: 2017-05-11
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