Dynamics of Islamic Financing in Malaysia: Causality and Innovation Accounting

Abstract

The article evaluates dynamic interactions between Islamic financing and macroeconomic and financial variables for Malaysia using the Toda-Yamamoto (1995) causality test and innovation accounting approach. The results suggest strong causal influences of interest rate on Islamic financing but insignificant causal relations from real stock prices or real production to Islamic financing. Thus, while the results suggest that Islamic financing in Malaysia is resilient to boom/bust cycles of the stock market or fluctuations in real activity, Islamic banks under a dual-banking environment are not spared from fluctuations in interest rate or monetary conditions of the country.

Keywords:

• Islamic financing
• causality
• innovation accounting
• Malaysia

Acknowledgments

We would like to thank two anonymous referees of the journal for the constructive comments. We, however, are responsible for the remaining errors.

Notes

1. In line with conventional banks, Islamic banks also offer other form of deposits such as current or checkable deposits. However, the Islamic banks do not offer a fixed interest payment on these deposits.

2. This list of financing products is by no means exhaustive. They are provided to picture Islamic banks' principle of operations. For details of financing products of Islamic banks, please refer to Ayub (2007).