Title: Dynamic relation between Islamic and conventional lending rates in Malaysia

Authors: Siew-Peng Lee; Noor Azryani Auzairy; Mansor Isa; Chee-Keong Choong

Addresses: Faculty of Accountancy and Management, University of Tunku Abdul Rahman, 43000 Selangor, Malaysia ' Faculty Economics and Management, National University of Malaysia, 43600 Selangor, Malaysia ' Faculty of Business and Accountancy, University of Malaya, 50603 Kuala Lumpur, Malaysia ' Faculty of Business and Finance, University of Tunku Abdul Rahman, 31900 Kampar, Malaysia

Abstract: Conceptually, the Islamic and conventional banking rates are supposedly determined based on different premises, and empirical evidence appears to suggest that they are closely related. However, the findings are not unanimous. This paper offers Malaysian evidence of the extent of relatedness between Islamic and conventional lending rates in a dual-banking system. Our data consists of two pairs of Islamic and conventional lending rates: the base lending rates and the average lending rates. To test the relation, we use the standard methodologies of the Johansen cointegration, Granger causality, variance decomposition, and impulse response function. Our results indicate that there is no long-run relation between the Islamic and conventional lending rates for base lending rates; however, the average lending rates do indicate a cointegration between them. In the short-run the averages are independent. In general it may be concluded that Islamic borrowing may be considered a viable alternative to conventional bank borrowing.

Keywords: Islamic banking; Islamic finance; conventional lending rates; dual banking systems; Malaysia; Islamic lending rates; Islamic borrowing; Johansen cointegration; Granger causality; variance decomposition; impulse response.

DOI: 10.1504/AAJFA.2017.082929

Afro-Asian Journal of Finance and Accounting, 2017 Vol.7 No.1, pp.65 - 83

Received: 17 Dec 2015
Accepted: 25 Jun 2016
Published online: 15 Mar 2017 *

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