Does a country’s external debt level affect its Islamic banking sector development? Evidence from Malaysia based on Quantile regression and Markov regime-switching

Mohammed Yaw Broni; Mosharrof Hosen; Mansur Masih; Mohammed Yaw Broni; Mosharrof Hosen; Mansur Masih

doi:10.3934/QFE.2019.2.366

Quantitative Finance and Economics

2019, Volume 3, Issue 2: 366-389. doi: 10.3934/QFE.2019.2.366

Previous Article Next Article

Research article

Does a country’s external debt level affect its Islamic banking sector development? Evidence from Malaysia based on Quantile regression and Markov regime-switching

1.
School of Graduate Studies, International Center for Education in Islamic Finance, Kuala Lumpur, Malaysia
2.
Doctoral Candidate, Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Perak Campus, Kampar, Malaysia

Received: 17 April 2019 Accepted: 29 May 2019 Published: 11 June 2019
JEL Codes: C22, C58, G21, H63

The development of Islamic banking has attracted global attention, particularly since the sub-prime crisis (2007-2008). Despite the establishment of institutions and regulatory framework in countries that are at the forefront of promoting Islamic banking, some stakeholders seem to suggest that Islamic banking development is in stagnation. This may be due to the fact that such initiatives have often ignored the macroeconomic environment in which Islamic banks operate. One such environment, is the external debt level of a country in which Islamic banks operate. This paper makes an initial attempt to investigate firstly, the impact of external debt on Islamic banking development, and secondly, to find out whether the relationship between external debt and Islamic banking development is linear or non-linear. Analysing ten years' monthly data using VECM, Quantile Regression and Markov regime-switching techniques, the findings tend to suggest that, (a) there is a positive relationship between the external debt levels and Islamic banking development and, (b) However, the relationship seems to be non-linear. Under stable economic conditions, external debt has a higher impact on Islamic banking development compared to those of economic downturns, crises, and increased financial uncertainties.
- external debt,
- Islamic banking,
- quantiles,
- Markov regime-switching,
- Malaysia
Citation: Mohammed Yaw Broni, Mosharrof Hosen, Mansur Masih. Does a country’s external debt level affect its Islamic banking sector development? Evidence from Malaysia based on Quantile regression and Markov regime-switching[J]. Quantitative Finance and Economics, 2019, 3(2): 366-389. doi: 10.3934/QFE.2019.2.366

Related Papers:

Abstract

The development of Islamic banking has attracted global attention, particularly since the sub-prime crisis (2007-2008). Despite the establishment of institutions and regulatory framework in countries that are at the forefront of promoting Islamic banking, some stakeholders seem to suggest that Islamic banking development is in stagnation. This may be due to the fact that such initiatives have often ignored the macroeconomic environment in which Islamic banks operate. One such environment, is the external debt level of a country in which Islamic banks operate. This paper makes an initial attempt to investigate firstly, the impact of external debt on Islamic banking development, and secondly, to find out whether the relationship between external debt and Islamic banking development is linear or non-linear. Analysing ten years' monthly data using VECM, Quantile Regression and Markov regime-switching techniques, the findings tend to suggest that, (a) there is a positive relationship between the external debt levels and Islamic banking development and, (b) However, the relationship seems to be non-linear. Under stable economic conditions, external debt has a higher impact on Islamic banking development compared to those of economic downturns, crises, and increased financial uncertainties.

References

[1]	Abedifar P, Molyneux P, Tarazi A (2013) Risk in Islamic banking. Rev Financ 17: 2035–2096. doi: 10.1093/rof/rfs041
[2]	Alqahtani F, Mayes DG, Brown K (2016) Economic turmoil and Islamic banking: Evidence from the Gulf Cooperation Council. Pac-Basin Financ J 39: 44–56. doi: 10.1016/j.pacfin.2016.05.017
[3]	Basher SA, Kessler LM, Munkin MK (2017) Bank capital and portfolio risk among Islamic banks. Rev Financ Econ 24: 1–9.
[4]	Ehrhart H, Minea A, Villieu P (2014) Debt, seigniorage, and the growth laffer curve in developing countries. J Macroecon 42: 199–210. doi: 10.1016/j.jmacro.2014.07.004
[5]	Eichengreen B, Rose AK (1998) Staying afloat when the wind shifts: External factors and emerging-market banking crises. National Bureau of Economic Research, No. w6370.
[6]	Hallak I (2013) Private sector share of external debt and financial stability: Evidence from bank loans. J Int Money Financ 32: 17–41.
[7]	Hassan MK, Bashir AHM (2003) Determinants of Islamic banking profitability. In 10th ERF annual conference, Morocco, 2–31.
[8]	Hassan T, Mohamad S, Khaled I. Bader M (2009) Efficiency of conventional versus Islamic banks: evidence from the Middle East. Int J Islamic middle eastern financ manage 2: 46–65.
[9]	Hossain AA (2016) Inflationary shocks and real output growth in nine Muslim-majority countries: Implications for Islamic banking and finance. J Asian Econ 45: 56–73. doi: 10.1016/j.asieco.2016.06.004
[10]	Koenker R (2005) Quantile regression, Cambridge university press, No. 38.
[11]	Kumar M, Woo J (2010) Public debt and growth. IMF working papers, 1–47.
[12]	Krugman P (1988) Financing vs. forgiving a debt overhang. J Dev Econ 29: 253–268.
[13]	Magd HA, McCoy MP (2014) Islamic Finance Development in the Sultanate of Oman: Barriers and Recommendations. Pro Econ Financ 15: 1619–1631.
[14]	Mandilaras A, Bird G (2010) A Markov switching analysis of contagion in the EMS. J Int Money Financ 29: 1062–1075. doi: 10.1016/j.jimonfin.2010.03.001
[15]	Mansoor Khan M, Ishaq Bhatti M (2008) Development in Islamic banking: a financial risk-allocation approach. J Risk Financ 9: 40–51. doi: 10.1108/15265940810842401
[16]	Moody J, Levin U, Rehfuss S (1993) Predicting the US index of industrial production.
[17]	Naifar N, Hammoudeh S (2016) Do global financial distress and uncertainties impact GCC and global sukuk return dynamics?. Pac-Basin Financ J 39: 57–69. doi: 10.1016/j.pacfin.2016.05.016
[18]	Pattillo CA, Poirson H, Ricci LA (2002) External debt and growth. International Monetary Fund, No. 2002–2069.
[19]	Seguino S (2009) The global economic crisis, its gender implications, and policy responses. Gender Perspectives on the Financial Crisis Panel at the Fifty-Third Session of the Commission on the Status of Women, United Nations, 7.
[20]	Sukmana R, Ibrahim MH (2017) How Islamic are Islamic banks? A non-linear assessment of Islamic rate–conventional rate relations. Econ Model 64: 443–448.
[21]	Trenca I, Petria N, Corovei EA (2015). Impact of Macroeconomic Variables upon the Banking System Liquidity. Pro Econ Financ 32: 1170–1177. doi: 10.1016/S2212-5671(15)01583-X

Reader Comments

Your name:*

Email:*
© 2019 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)