Rosylin Mohd. Yusof

Long-run relationship between Islamic stock returns and macroeconomic variables: An application of the autoregressive distributed lag model

Purpose - The purpose of this paper is to explore the extent to which macroeconomic variables affect the Islamic stock market behavior in Malaysia in the post 1997 financial crisis period. Design/methodology/approach - The paper employs the latest estimation technique of autoregressive distributed lag (ARDL) model approach to cointegration. Findings - The results suggest that real effective exchange rate, money supply M3, treasury bill rate (TBR) and federal fund rate (FFR) seem to be suitable targets for the government to focus on, in order to stabilize the Islamic stock market and to encourage more capital flows into the market. As for the interest rates and stock returns relationship, the paper finds that when interest rates rise either domestically (TBR) or internationally (FFR), the Muslim investors will buy more Research limitations/implications - The results of this study are limited to the post 1997 financial crisis period until the beginning of the year 2006 for a small open economy, Malaysia. Practical implications - The paper reveals that both changes in the local monetary policy variables and in the US monetary policy as measured by the changes in the FFR have a significant direct impact on the Islamic stock market behavior in Malaysia. Originality/value - The paper adopts the latest time series econometrics technique to test for cointegration, ARDL. And it is among the earliest attempts to investigate the long-run effects of the macroeconomic variables changes either domestically or internationally on the Islamic stock market.

A comparative analysis of the performance of conventional and Islamic unit trust companies in Malaysia

Purpose - The purpose of this paper is to investigate the efficiency of selected conventional and Islamic unit trust companies in Malaysia during the period 2002 to 2005. Design/methodology/approach - The paper adopts Data Envelopment Analysis (DEA) to investigate efficiency, as measured by the Malmquist index, which is decomposed into two components: efficiency change and technical change indexes. Findings - The study indicates that technical efficiency is the main contributor to enhancing the efficiency of the Malaysian unit trust industry. In addition, the larger the size of the unit trust companies, the more inefficient the performance. In comparing the efficiency of unit trust companies, the study finds that some of the Islamic unit trust companies perform better than their conventional counterparts. Research limitations/implications - The study is limited to five Islamic unit trust companies. Thus, the findings of this study are indicative, but inconclusive for the unit trust industry as a whole. Practical implications - The results have two important implications for both conventional and Islamic unit trust companies in Malaysia. First, the deterioration of total factor productivity (TFP) in the unit trust industry in Malaysia is due to the deficiency of innovation in technical components. Second, the size of the unit trust companies has an adverse effect on the TFP performance. Originality/value - The contribution of this study is that it analyzes the efficiency of the two types of unit trust industry which are important and relevant for Malaysia. This significance arises from the dual financial system, in which the Islamic unit trust companies operate in parallel with their conventional counterparts. The comparison sheds some light on the performance of the Islamic unit trust companies, whose operations are based on profit-sharing, in contrast to the conventional unit trust companies.

Determining the viability of rental price to benchmark Islamic home financing products: Evidence from Malaysia

Purpose – The purpose of this paper is to analyze the possibility of relying on the rental rate to price Islamic home financing product.Design/methodology/approach – By comparing two models consisting of either rental rate or lending rate (LR) and selected macroeconomic variables that could influence property value, the study focuses on the Malaysian data covering the period from 1990 to 2006. The study adopts several econometric time‐series analysis, such as the autoregressive distributed lag estimates, bi‐variate Granger causality, and multivariate causality based on the vector error‐correction model.Findings – The study finds consistent evidence that the rental price (RP) is a better alternative than the LR to price Islamic home financing product. In particular, the rental rate is found to be resilient to short‐term economic volatility, while in the long run, it is truly reflective of the economic fundamentals.Practical implications – This feature of the RP renders it as a fair pricing mechanism for th...

Towards an Islamic international financial hub: the role of Islamic capital market in Malaysia

Purpose - In line with the governments policy to promote Malaysia as an international hub for Islamic banking and finance, the purpose of this paper is to evaluate the dynamic effects of both Islamic and conventional stock markets on foreign portfolio investments. Design/methodology/approach - First, the paper explores the short and long-run relationships between (FPI) and three markets, i.e. the goods, money, and securities market. Second, the paper attempts to examine the relative importance of the three markets in accounting for variations in FPI. Consistent with earlier studies, the goods market variable considered is real income (Y). The money market variables tested are the broad money supply (M2), treasury bill rate (TBR) and the US Federal Fund rate (FFR), while the security market is represented by both Kuala Lumpur Findings - The findings of the study indicate that among the three markets studied, the securities market in Malaysia (both conventional and Islamic) is the most significant market in attracting FPI into the economy. This implies that to a certain extent, the governments effort in promoting Malaysia as the international hub for the Islamic capital market has been successful. Originality/value - The paper suggests that further efforts need to be enhanced in promoting Malaysia as the International hub for the Islamic banking and finance. The papers findings shed some light on the policy ramifications pertaining to attracting foreign investors into the ICM in Malaysia and in moving towards a more globally competitive capital market.

Rental index rate as an alternative to interest rate in Musharakah Mutanaqisah home financing: A simulation approach

Purpose - This paper proposes a new pricing alternative called Rental Rate Index (RR-I) that captures the true value of property to be employed by Islamic banks in Musharakah Mmutanaqisah (MM) contract for home financing. Design/methodology/approach - By formulating a profit rate based on Rental Index (RI) and House Price Index (HPI), our proposed rate eliminates conventional profit rate benchmarking, and at the same time, suggests a fair, equitable and sustainable financing. This new rental rate (RR-I) (measured by RPI/HPI) enables computerization of the MM system in home financing to be easily implemented. A financial simulation is developed in order to demonstrate the feasibility of this newly proposed rate. Findings - Our newly proposed RR-I is found to be more stable, having less fluctuations, resilient to macroeconomic conditions and yet comparable to the conventional interest rates without depending on them. It can also be regarded as a rate that is fair and sustainable to both the customer as well as the bank as it measures the actual rate of return to both parties in Musyarakah Mutanaqisah contract. Research limitations/implications - The paper confines once contract namely Musharakah Mutanaqisah as it is claimed to more Shariah compliance compared to others. Practical implications - The finding also shed some light on the recommendation by Bank Negara Malaysia which is to consider rental rate that is more indicative of the actual rental price while taking into account the competitiveness of the product. (BNM, 2007) Originality/value - This paper attempts to resolve the issue of benchmarking rental rate to the conventional interest rate in Musyarakah Mutanaqisah contract. Studies conducted on this issue via simulation approach are meager.

The role of goods, money and securities markets in promoting family takaful in Malaysia

In line with the governments policy to promote Malaysia as an international hub for Islamic banking and finance, the dynamic effects of goods, money and securities markets on the development of family takaful (Islamic life insurance) in the country during the period from 1999 : Q1 to 2006 : Q4 are empirically examined. Specifically, it seeks to explore the short- and long-run dynamics and the causalities between takaful performance and the goods market, money market, and securities market. The findings indicate that, the goods market is the most significant market in promoting family takaful in Malaysia. This implies that, the governments effort has been successful, thus far.

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 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.