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Macroeconomic shocks, fragility and home financing in Malaysia: can rental index be the answer?

Purpose: This study aims to investigate the interactions among macroeconomic variable shocks, banking fragility and home financing provided by conventional and Islamic banks in Malaysia. Identifying the causes of financial instability and the effects of macroeconomic shocks can help to foil the onse...

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Main Authors: Mohd Yusof, Rosylin, Usman, Farrell Hazsan, Mahfudz, Akhmad Affandi, Che Mohamed Arif, Ahmad Suki
Format: Article
Language:English
Published: Emerald Publishing Limited 2018
Subjects:
HG Finance
Online Access:http://repo.uum.edu.my/25611/1/JIABR%209%201%202018%2017%2044.pdf
http://repo.uum.edu.my/25611/
http://doi.org/10.1108/JIABR-11-2015-0058
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id my.uum.repo.25611
record_format eprints
institution Universiti Utara Malaysia
building UUM Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Universiti Utara Malaysia
content_source UUM Institutionali Repository
url_provider http://repo.uum.edu.my/
language English
topic HG Finance
spellingShingle HG Finance
Mohd Yusof, Rosylin
Usman, Farrell Hazsan
Mahfudz, Akhmad Affandi
Che Mohamed Arif, Ahmad Suki
Macroeconomic shocks, fragility and home financing in Malaysia: can rental index be the answer?
description Purpose: This study aims to investigate the interactions among macroeconomic variable shocks, banking fragility and home financing provided by conventional and Islamic banks in Malaysia. Identifying the causes of financial instability and the effects of macroeconomic shocks can help to foil the onset of future financial turbulence. Design/methodology/approach: The autoregressive distributed lag bound-testing cointegration approach, impulse response functions (IRFs) and forecast error variance decomposition are used in this study to unravel the long-run and short-run dynamics among the selected macroeconomic variables and amount of home financing offered by both conventional and Islamic banks. In addition, the study uses Granger causality tests to investigate the short-run causalities among the selected variables to further understand the impact of one macroeconomic shock to Islamic and conventional home financing.Findings:This study provides evidence that macroeconomic shocks have different long-run and short-run effects on amount of home financing offered by conventional and Islamic banks. Both in the long run and short run, home financing provided by Islamic banks is more linked to real sector economy and thus is more stable as compared to home financing provided by conventional banks. The Granger causality test reveals that only gross domestic product (GDP), Kuala Lumpur Syariah Index (KLSI)/Kuala Lumpur Composite Index (KLCI) and house price index (HPI) are found to have a statistically significant causal relationship with home financing offered by both conventional and Islamic banks. Unlike the case of Islamic banks, conventional home financing is found to have a unidirectional causality with interest rates.Research limitations/implications This study has focused on analyzing the macroeconomic shocks on home financing. However, this study does not assess the impact of financial deregulation and enhanced information technology on amount of financing offered by both conventional and Islamic banks. In addition, it is not within the ambit of this present study to examine the effects of agency costs and information asymmetry.Practical implications: The analysis of cointegration and IRFs exhibits that in the long run and short run, home financing provided by Islamic banks are more linked to real sector economy like GDP and House Prices (HPI) and therefore more resilient to economic vulnerabilities as compared to home financing provided by conventional banks. However, in the long run, both conventional and Islamic banks are more susceptible to fluctuations in interest rates. The results of the study suggest that monetary policy ramifications to improve banking fragility should focus on stabilizing interest rates or finding an alternative that is free from interest.Social implications: Because interest plays a significant role in pricing of home loans, the potential of an alternative such as rental rate is therefore timely and worth the effort to investigate further. Therefore, Islamic banks can explore the possibility of pricing home financing based on rental rate as proposed in this study. Originality/value: This paper examines the unresolved issues in Islamic home financing where Islamic banks still benchmark their products especially home financing, to interest rates in dual banking system such as in the case of Malaysia. To the best of the authors’ knowledge, studies conducted in this area are meager and therefore is imperative to be examined.
format Article
author Mohd Yusof, Rosylin
Usman, Farrell Hazsan
Mahfudz, Akhmad Affandi
Che Mohamed Arif, Ahmad Suki
author_facet Mohd Yusof, Rosylin
Usman, Farrell Hazsan
Mahfudz, Akhmad Affandi
Che Mohamed Arif, Ahmad Suki
author_sort Mohd Yusof, Rosylin
title Macroeconomic shocks, fragility and home financing in Malaysia: can rental index be the answer?
title_short Macroeconomic shocks, fragility and home financing in Malaysia: can rental index be the answer?
title_full Macroeconomic shocks, fragility and home financing in Malaysia: can rental index be the answer?
title_fullStr Macroeconomic shocks, fragility and home financing in Malaysia: can rental index be the answer?
title_full_unstemmed Macroeconomic shocks, fragility and home financing in Malaysia: can rental index be the answer?
title_sort macroeconomic shocks, fragility and home financing in malaysia: can rental index be the answer?
publisher Emerald Publishing Limited
publishDate 2018
url http://repo.uum.edu.my/25611/1/JIABR%209%201%202018%2017%2044.pdf
http://repo.uum.edu.my/25611/
http://doi.org/10.1108/JIABR-11-2015-0058
_version_ 1644284375210131456
spelling my.uum.repo.256112019-02-19T08:33:49Z http://repo.uum.edu.my/25611/ Macroeconomic shocks, fragility and home financing in Malaysia: can rental index be the answer? Mohd Yusof, Rosylin Usman, Farrell Hazsan Mahfudz, Akhmad Affandi Che Mohamed Arif, Ahmad Suki HG Finance Purpose: This study aims to investigate the interactions among macroeconomic variable shocks, banking fragility and home financing provided by conventional and Islamic banks in Malaysia. Identifying the causes of financial instability and the effects of macroeconomic shocks can help to foil the onset of future financial turbulence. Design/methodology/approach: The autoregressive distributed lag bound-testing cointegration approach, impulse response functions (IRFs) and forecast error variance decomposition are used in this study to unravel the long-run and short-run dynamics among the selected macroeconomic variables and amount of home financing offered by both conventional and Islamic banks. In addition, the study uses Granger causality tests to investigate the short-run causalities among the selected variables to further understand the impact of one macroeconomic shock to Islamic and conventional home financing.Findings:This study provides evidence that macroeconomic shocks have different long-run and short-run effects on amount of home financing offered by conventional and Islamic banks. Both in the long run and short run, home financing provided by Islamic banks is more linked to real sector economy and thus is more stable as compared to home financing provided by conventional banks. The Granger causality test reveals that only gross domestic product (GDP), Kuala Lumpur Syariah Index (KLSI)/Kuala Lumpur Composite Index (KLCI) and house price index (HPI) are found to have a statistically significant causal relationship with home financing offered by both conventional and Islamic banks. Unlike the case of Islamic banks, conventional home financing is found to have a unidirectional causality with interest rates.Research limitations/implications This study has focused on analyzing the macroeconomic shocks on home financing. However, this study does not assess the impact of financial deregulation and enhanced information technology on amount of financing offered by both conventional and Islamic banks. In addition, it is not within the ambit of this present study to examine the effects of agency costs and information asymmetry.Practical implications: The analysis of cointegration and IRFs exhibits that in the long run and short run, home financing provided by Islamic banks are more linked to real sector economy like GDP and House Prices (HPI) and therefore more resilient to economic vulnerabilities as compared to home financing provided by conventional banks. However, in the long run, both conventional and Islamic banks are more susceptible to fluctuations in interest rates. The results of the study suggest that monetary policy ramifications to improve banking fragility should focus on stabilizing interest rates or finding an alternative that is free from interest.Social implications: Because interest plays a significant role in pricing of home loans, the potential of an alternative such as rental rate is therefore timely and worth the effort to investigate further. Therefore, Islamic banks can explore the possibility of pricing home financing based on rental rate as proposed in this study. Originality/value: This paper examines the unresolved issues in Islamic home financing where Islamic banks still benchmark their products especially home financing, to interest rates in dual banking system such as in the case of Malaysia. To the best of the authors’ knowledge, studies conducted in this area are meager and therefore is imperative to be examined. Emerald Publishing Limited 2018 Article PeerReviewed application/pdf en http://repo.uum.edu.my/25611/1/JIABR%209%201%202018%2017%2044.pdf Mohd Yusof, Rosylin and Usman, Farrell Hazsan and Mahfudz, Akhmad Affandi and Che Mohamed Arif, Ahmad Suki (2018) Macroeconomic shocks, fragility and home financing in Malaysia: can rental index be the answer? Journal of Islamic Accounting and Business Research, 9 (1). pp. 17-44. ISSN 1759-0817 http://doi.org/10.1108/JIABR-11-2015-0058 doi:10.1108/JIABR-11-2015-0058
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