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The impact of interest rate changes on islamic home financing: Malaysia as a case study

Author

Listed:
  • Hashim, Norhaziah
  • Masih, Mansur

Abstract

This paper investigated the impact of interest rate changes, specifically the base lending rate (BLR) on the demand for Islamic home financing in a dual banking system. Malaysia is taken as a case study. Theoretically, any increase in the interest rate (base lending rate), would lead customers who are guided by the profit motive to substitute Islamic home financing for conventional bank home loans and vice versa. Using a 109 monthly data series covering ten years, the study found that an increase in the base lending rate would trigger customers to obtain financing from Islamic banks. Conversely, any decrease in the base lending rate would induce customers to shift to the conventional home loans. The paper concludes that because customers are profit motivated, Islamic banks in the dual banking system, such as in Malaysia are exposed to interest rate risks despite operating on an interest free principle.

Suggested Citation

  • Hashim, Norhaziah & Masih, Mansur, 2018. "The impact of interest rate changes on islamic home financing: Malaysia as a case study," MPRA Paper 100644, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:100644
    as

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    References listed on IDEAS

    as
    1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    2. Masih, Rumi & Masih, Abul M. M., 2001. "Long and short term dynamic causal transmission amongst international stock markets," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 563-587, August.
    3. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Islamic financing; Bai-Bithaman Ajil; interest rates; base lending rates; Malaysia;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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