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How do interest rate changes affect Islamic banks? empirical evidence on Islamic banks in Malaysia

Purpose; Little empirical evidence has showed that financial systems with dual banking systems are relatively more resilience against many financial crises, especially to changes in interest rate levels. In the same vein, this study investigates the impact of interest rates on Malaysian Islamic bank...

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Main Authors: Aliaziz, Muhammad Hafiz, Abdul Rahim, Norhuda, Yahya, Mohamed Hisham
Format: Article
Language:English
Published: Institut Perakaunan Negara, Jabatan Akauntan Negara Malaysia 2020
Online Access:http://psasir.upm.edu.my/id/eprint/89208/1/RATES.pdf
http://psasir.upm.edu.my/id/eprint/89208/
http://jurnal.ipn.gov.my/volume-10/
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spelling my.upm.eprints.892082021-09-03T21:57:45Z http://psasir.upm.edu.my/id/eprint/89208/ How do interest rate changes affect Islamic banks? empirical evidence on Islamic banks in Malaysia Aliaziz, Muhammad Hafiz Abdul Rahim, Norhuda Yahya, Mohamed Hisham Purpose; Little empirical evidence has showed that financial systems with dual banking systems are relatively more resilience against many financial crises, especially to changes in interest rate levels. In the same vein, this study investigates the impact of interest rates on Malaysian Islamic banks by analysing the relationship between changes in interest rates on Islamic banks' deposits and financing, Design: The objective is investigated using the ARDL bounds test with 144 observations of monthly data from 2007 to 2018. The unit root tests of Augmented Dickey and Fuller (ADF) and the Phillips-Peron (PP) were conducted, followed by the diagnostic tests of serial correlation and heteroscedasticity, and Cumulative Sum of Recursive Residuals or CUSUM and CUSUM Square stability test to ensure robustness of the results. The robustness of the findings is confimed with diagnostic tests. Findings: The study that interest rates have relationship with both deposit and financing of Malaysian Islamic banks in the long runs. This means that in the long run, when interest rates increases, both deposits and financing of an Islamic bank are still increasing. Futhermore, the religious factor is found to play a role in Malaysian's banking decisions. Practical implications: Firstly, the study highlights that the dual banking system is more resilient than the single banking system as the Islamic banking system is not affected by the conventional interbank rates. However, it also provides evidence that Islamic banks are not entirely independent from the effect of conventional interest rates. Therefore, the Islamic banks need to be attentive to interest rates risk in their risk management, as it could influence the value of their assets and obligations. It also highlights the necessary timing for market to revert back for both institutions’ and investors’ discretion. Secondly, due to all reasons above, the Bank Negara Malaysia needs to be cautious in designing monetary policies as such both government and public sectors can strategize the financing of the country. Originality and value: Providing the most recent sets of data, this study is invaluable to the government, public sectors; financial institutions, investor and fellow academicians. It also adds value to Islamic Bank literature. Institut Perakaunan Negara, Jabatan Akauntan Negara Malaysia 2020 Article PeerReviewed text en http://psasir.upm.edu.my/id/eprint/89208/1/RATES.pdf Aliaziz, Muhammad Hafiz and Abdul Rahim, Norhuda and Yahya, Mohamed Hisham (2020) How do interest rate changes affect Islamic banks? empirical evidence on Islamic banks in Malaysia. IPN Journal of Research and Practise in Public Sector Accounting and Management, 10 (1). 97 - 115. ISSN 2180-4508; ESSN: 2682-9347 http://jurnal.ipn.gov.my/volume-10/
institution Universiti Putra Malaysia
building UPM Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Universiti Putra Malaysia
content_source UPM Institutional Repository
url_provider http://psasir.upm.edu.my/
language English
description Purpose; Little empirical evidence has showed that financial systems with dual banking systems are relatively more resilience against many financial crises, especially to changes in interest rate levels. In the same vein, this study investigates the impact of interest rates on Malaysian Islamic banks by analysing the relationship between changes in interest rates on Islamic banks' deposits and financing, Design: The objective is investigated using the ARDL bounds test with 144 observations of monthly data from 2007 to 2018. The unit root tests of Augmented Dickey and Fuller (ADF) and the Phillips-Peron (PP) were conducted, followed by the diagnostic tests of serial correlation and heteroscedasticity, and Cumulative Sum of Recursive Residuals or CUSUM and CUSUM Square stability test to ensure robustness of the results. The robustness of the findings is confimed with diagnostic tests. Findings: The study that interest rates have relationship with both deposit and financing of Malaysian Islamic banks in the long runs. This means that in the long run, when interest rates increases, both deposits and financing of an Islamic bank are still increasing. Futhermore, the religious factor is found to play a role in Malaysian's banking decisions. Practical implications: Firstly, the study highlights that the dual banking system is more resilient than the single banking system as the Islamic banking system is not affected by the conventional interbank rates. However, it also provides evidence that Islamic banks are not entirely independent from the effect of conventional interest rates. Therefore, the Islamic banks need to be attentive to interest rates risk in their risk management, as it could influence the value of their assets and obligations. It also highlights the necessary timing for market to revert back for both institutions’ and investors’ discretion. Secondly, due to all reasons above, the Bank Negara Malaysia needs to be cautious in designing monetary policies as such both government and public sectors can strategize the financing of the country. Originality and value: Providing the most recent sets of data, this study is invaluable to the government, public sectors; financial institutions, investor and fellow academicians. It also adds value to Islamic Bank literature.
format Article
author Aliaziz, Muhammad Hafiz
Abdul Rahim, Norhuda
Yahya, Mohamed Hisham
spellingShingle Aliaziz, Muhammad Hafiz
Abdul Rahim, Norhuda
Yahya, Mohamed Hisham
How do interest rate changes affect Islamic banks? empirical evidence on Islamic banks in Malaysia
author_facet Aliaziz, Muhammad Hafiz
Abdul Rahim, Norhuda
Yahya, Mohamed Hisham
author_sort Aliaziz, Muhammad Hafiz
title How do interest rate changes affect Islamic banks? empirical evidence on Islamic banks in Malaysia
title_short How do interest rate changes affect Islamic banks? empirical evidence on Islamic banks in Malaysia
title_full How do interest rate changes affect Islamic banks? empirical evidence on Islamic banks in Malaysia
title_fullStr How do interest rate changes affect Islamic banks? empirical evidence on Islamic banks in Malaysia
title_full_unstemmed How do interest rate changes affect Islamic banks? empirical evidence on Islamic banks in Malaysia
title_sort how do interest rate changes affect islamic banks? empirical evidence on islamic banks in malaysia
publisher Institut Perakaunan Negara, Jabatan Akauntan Negara Malaysia
publishDate 2020
url http://psasir.upm.edu.my/id/eprint/89208/1/RATES.pdf
http://psasir.upm.edu.my/id/eprint/89208/
http://jurnal.ipn.gov.my/volume-10/
_version_ 1710677173401026560
score 13.211869

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