HOUSE PRICE CHANGES AND ISLAMIC BANK STABILITY: EVIDENCE FROM MALAYSIA
In this paper, we examine the relationship between house price and Islamicbank stability in Malaysia. In particular, in relating to Islamic bank stability toMalaysian house price changes, we evaluate the nature of the relationship from theperspective of nonlinearities. The Autoregressive Distributed Lag (ARDL) modelis applied to a sample that consists of 9 Islamic banks in Malaysia for the periodof 2000-2016. Our results indicate that there is an inverted U-shaped relationshipbetween house price and Islamic bank stability in the long run. Meanwhile, therelationship is insignificant in the short-run. To put it differently, initially, thehigher house prices, the more stable the bank. Then, the impact of house prices onbank stability becomes negative when house prices surpass the threshold point.As far as the bank-specific characteristics are concerned, the cost to income ratiois found to significantly and negatively related to the bank stability. Such a resulthas policy implications in which it is crucial for achieving balance in the housingmarket, and efficiently managing the cost is equally important to ensure Islamicbank soundness.
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