Abstract
The purpose of this study is to investigate the effect of Inter-bank Investment and changes in monetary policy on financing behaviour of Islamic banks in Malaysia. The change occurring in bank specifications and changes in monetary policy, will lead financial authorities generally, banking management specifically to make modifications on financing. In order to achieve the objective, this study employs panel data estimation of 17 Malaysian banks for the period of 1994-2014. Findings revealed that the pattern and behaviour of Islamic banking in offering financing is influenced by the investment in inter-bank investment and also by the factors such as level of past financing, the exposure to risk, size and structure of the capitalisation level. While for monetary policy factor, financing behaviour of Islamic banking is influenced by Malaysian government securities (MGS). Next to the economic environment, the study showed no significant relationship to the behaviour of the Malaysian Islamic banking financing.
TopBackground
Since Islamic banking was established in Malaysia in 1983, financing growth rate showed an encouraging performance. However, that performance was not consistent over the operation period of 27 years. Since there are circumstances where it is affected in economy situation. The evidence is in 1987 and 1998 when the global economy was suffering from the recession. At that time Islamic banking financing decreased from 18.36 percent to 2.68 percent. However, this situation improved and the amount of Islamic financing continued to rise for the next year since the world economy got in good condition and stable.
Table 1 shows the use of the Malaysia Islamic banking funds in aggregate in the form of several types of financing. In reference to the table, the Islamic banking financing flows are broken down into some type of overdraft financing: term financing, bill financing, trust receipts, revolving credit in foreign currencies, and the rest is represented by other available financing. During the five years of 2006 to 2010, the direction of financing flow of Malaysia Islamic banking increased around 11 to 25 percent each year with the latest financing in December 2010 making RM162,412.6 million. The majority of the total financing is contributed by the term financing type that covered financing such as leasing, financing by block, syndicate, factoring, private financing, home financing and others. Meanwhile the least type of financing demand by the client is the trustworthy receipt1 which only represents around 0.4 per cent from the total financing every year (Mahmood, 1997).
Key Terms in this Chapter
Consumer Price Index (cpit): The relationship between the consumer price index or inflation with bank performance depends on whether inflation is expected (anticipated) or unexpected (unanticipated). In the second case (ie, inflation is not expected), the bank's actions in adjusting interest rates be the leading bank costs have increased more than the bank. This second type of inflation has a negative impact on bank profits, which in turn reduces the capital structure.
Bank Profit (profitit): Measurement of profit before tax divided by total assets in bank. This variable indicates the number of bank profits to total assets.
Growth Domestic Product (?gdpt): This is a key indicator of a country's macroeconomic management. Any changes in this indicator will change the loan/financing which in turn affects the adjustment capital ratio and bank risk observation for certain years.
Total Financing (TF): This ratio shows the behavior of banks in the pursuit of profit and risk-taking. This behavior is consistent with profit-sharing paradigm that allows Islamic banking offer long-term financing to the project risk profile and high returns.
Economic Freedom Index (econfree t): A ranking of countries or states based on the number and intensity of government regulations on wealth-creating activity. Metrics that an economic freedom index evaluates include international trade restrictions, government spending relative to GDP, occupational licensing requirements, private property rights, minimum wage laws and other government-controlled factors that affect people's ability to earn a living and keep what they earn. Such indexes are usually produced by economic think tanks.
Malaysian Government Securities (mgst): Islamic securities that shows the loan by the government from financial institutions and others. Effectively it is a loan taken by the government of the people themselves. These loans are usually required by the state to finance recurrent expenditure and development expenditure for public projects.
Islamic Interbank Investment Rate (iibrt): A short-term intermediary to provide a ready source of short-term investment outlets based on Syariah principle. Through the IIMM, the Islamic banks and banks participating in the Islamic Banking Scheme (IBS) would be able to match the funding requirements effectively and efficiently.
Money Supply (?M3t): Growth in money supply indicators show real growth potential, especially for future growth.
Capitalization (capit): Capital and reserves, as a part of the liabilities in the balance sheet total. This includes paid-up capital, reserve funds, retained earnings and other capital funds. Capital and reserves comprise own funds or a bank's core capital. More investment risk was so much more is needed capital.
Bank Size (sizeit): This ratio represents the ownership of assets by banks. High asset ownership enables banks to offer more financial services at low cost.
Bank Risk (riskit): Describe the results of risk-taking by banks in the appropriate timeliness. The dependence of these indicators suggest risk weights reflect the economic risks for different asset categories.