• Shiau Hui Kok Sunway College, Malaysia
  • Normaz Wana Ismail Universiti Putra Malaysia, Malaysia
Keywords: House Prices;, Islamic Bank Stability;, ARDL;, Non-Linear;, Malaysia


In this paper, we examine the relationship between house price and Islamic bank stability in Malaysia. In particular, in relating to Islamic bank stability to Malaysian house price changes, we evaluate the nature of the relationship from the perspective of nonlinearities. The Autoregressive Distributed Lag (ARDL) model is applied to a sample that consists of 9 Islamic banks in Malaysia for the period of 2000-2016. Our results indicate that there is an inverted U-shaped relationship between house price and Islamic bank stability in the long run. Meanwhile, the relationship is insignificant in the short-run. To put it differently, initially, the higher house prices, the more stable the bank. Then, the impact of house prices on bank stability becomes negative when house prices surpass the threshold point. As far as the bank-specific characteristics are concerned, the cost to income ratio is found to significantly and negatively related to the bank stability. Such a result has policy implications in which it is crucial for achieving balance in the housing market, and efficiently managing the cost is equally important to ensure Islamic bank soundness.


Abdul-Rahman, A. (2009). Lending Structure and Market Risk Exposures: The Malaysian Case. Asian Academy of Management Journal, 14(2), 1–20.

Abdul-rahman, A., Mohd Said, N. L. H., & Sulaiman, A. A. (2017). Financing Structure and Liquidity Risk: Lesson from Malaysian. Journal of Central Banking Theory, 2, 125–148.

Abedifar,P., Molyneux,P., & Tarazi, A. (2013). Risk in Islamic Banking. Review of Finance, 17(6), 2035-2096.

Ahmed, H., Asutay, M., & Rodney, W. (2014). Reflecting on Islamic Banking and Financial Crisis: Reputation, Stability and Risk. In H. Ahmed, M. Asutay, & R. Wilson (Eds.), Islamic Banking and Financial Crisis: Reputation, Stability and Risk(pp. 1–20).

Allen, F., & Gale, D. (2001). Comparing Financial Systems. Cambridge, MA:MIT Press.Alqahtani,F., & Mayes,D.G.(2018). Financial Stability of Islamic Banking and The Global Financial Crisis: Evidence From The Gulf Cooperation Council. Economic Systems, 42, 346-360.

Baele, L., Farooq, M., & Ongena, S. (2014). Of Religion and Redemption: Evidence From Default on Islamic Loans. Journal of Banking and Finance, 44, 141–159.

Beck, T., Jonghe, O. De, & Schepens, G. (2013). Bank Competition and Stability: Cross-country Heterogeneity. Journal of Financial Intermediation, 22(2), 218–244.

Bernanke, B., & Gertler, M. (1989). Agency Costs, Net Worth, and Business Fluctuations. The Americal Economic Review, 79(1), 14-31.

BNM. (2018). Bank Negara Malaysia Monthly Highlights and Statistics in December 2018. Retrieved from〈=en&uc=2

Bongini, P., Claessens, S., & Ferri, G. (2001). The Political Economy and Distress in East Asian Financial Institutions. Journal of Financial Services Research, 19(1), 5-25.

Bourkhis,K., & Nabi, M.S. (2013). Islamic and Conventional Bank’s Soundness during the 2007-2008 Financial Crisis. Review Financial Economics, 22(2), 68-77.

Boyd, J. H. & De Nicolo, G. (2005).The Theory of Bank Risk Taking and Competition Revisited. The Journal of Finance, 60(3), 1329-1343.

Calomiris, C. W., & Mason, J. R. (2003). Fundamentals, Panics, and Bank Distress during the Depression. American Economic Review, 93(5), 1615-1647.

Cebula, R., Koch, J., & Fenili, R. (2011). The Bank Failure Rate, Economic Conditions and Banking Statutes in the U.S., 1970–2009. Atlantic Economic Journal, 39(1), 39-46.

Chakroun, M. A., & Gallali, M. I. (2011). Risk and Stability in Islamic Banking. International Journal of Business and Commerce, 5(3), 64–87.

Chen, N-K. (2001). Bank Net Worth, Asset Prices and Economic Activity. Journal of Monetary Economics, 48, 415-436.

Chiesa, G. (2001). Incentive-based Lending Capacity, Competition, and Regulation in Banking. Journal of Financial Intermediation, 10, 28-53.

Choong, Y.V., Thim,C.K., & Kyzy, B.T. (2012). Performance of Islamic Commercial Banks in Malaysia: An empirical study. Journal of Islamic Economics Banking and Finance, 8, 67-79.

Cihak,M., & Hesse,H. (2010). Islamic Bank and Financial Stability: An-Empirical Analysis. Journal of Financial Services Research, 38(2-3), 95-113.

DeYoung,R., & Torna,G. (2013). Nontraditional Banking Activities and Bank Failures during The Financial Crisis. Journal of Financial Intermediation, 22(3), 397-421.

Diamond, D.W.,& Rajan, R.G.(2006). Money in a Theory of Banking. The American Economic Review, 96(1), 30-53.

Dieci, R., & Westerhoff, F. (2012). A Simpe Model of a Speculative Housing Market. Journal of Evolutionary Economics, 22(2), 303–329.

Gennaioli, N., Shleifer, A., & Vishny, R. (2012). Neglected Risks, Financial Innovation, and Financial Fragility. Journal of Financial Economics, 104(3), 452–468.

Gerlach,S., & Peng,W. (2005). Bank Lending and Property Prices in Hong Kong. Journal of Banking and Finance, 29, 461-481.

Gersbach, H. (2002). Financial Intermediation and The Creation of Macroeconomics Risks. Cesifo Working Paper No.695(6), April 2002.

Hasan, M., & Dridi, J. (2010). The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study (IMF Working Paper No. WP/10/201).

Holmstrom,B., & Tirole,J. (1997). Intermediation, Loanable Funds, and Real Sector. The Quarterly Journal of Economics, 112(3), 663-691.

Jiménez, G., Lopez,J.A., & Saurina, J.(2013). How Does Competition Affect Bank Risk-Taking? Journal of Financial Stability, 9(2), 185-195.

Keeley, M.C. (1990). Deposit Insurance, Risk and Market Power in Banking. American Economic Review, 80, 1183-1200.

Khaddafi, M., Falahuddin, Heikal,M., & Nandari, A. (2017). Analysis Z-Score to Predict Bankcrupty in Banks Listed in Indonesia Stock Exchange. International Journal of Economics and Financial Issues, 7(3), 326-330.

Khor,H.E., & Kee, R.X. (2008). Asia: A Perspective on the Sub-Prime Crisis. Finance & Development, 45(2), accessed 10 June 2017 at

Kiyotaki, N., & Moore, J. (1997). Credit Cycles. Journal of Political Economy, 105(2), 211-247.

Koetter, M., & Poghosyan, T. (2010). Real Estate Prices and Bank Stability. Journal of Banking and Finance, 34(6), 1129–1138.

Kosmidou,K., Tanna, S., & Pasioures, F. (2005). Determinants of Probability of Domestic UK Commercial Bank: Panel Evidence From 1995-2002, Money Macro and Finance MMF Research Group Conference.

Li, Y.J.(2015). Geography of Crime in China since The Economic Reform of 1978: A Multi Scale Analysis.UK: Cambridge Scholar Publishing.

Lind, J. T., & Mehlum, H. (2010). With or Without U? The Appropriate Test for a U-Shaped Relationship. Oxford Bulletin Economics Statistics, 72(1), 109-118.

Messai A, S., & Gallali, M. (2015). Financial Leading Indicators of Banking Distress: A Micro Prudential Approach - Evidence from Europe. Asian Social Science, 11(21), 78-90.

Moinescu, B-G. (2012). Determinants of Nonperforming Loans in Central and European Countries: Macroeconomics Indicators and Credit Discipline. Review of Economic and Business Studies, 5(2), 47-58.

Pan, H., & Wang, C. (2013). House Prices, Bank Instability, and Economic Growth: Evidence from the Threshold Model. Journal of Banking and Finance, 37(5), 1720–1732.

Reinhart, K. S., & Rogoff, K.S. (2008). This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises (NBER Working Paper No. 13882). Retrieved from National Bureau of Economic Research website:

Von Peter, G. (2009). Asset Prices and Banking Distress: A Macroeconomics Approach. Journal of Financial Stability, 5, 298–319.

Vogiazas, S. D., & Nikolaidou, E. (2011). Investigating the Determinants of Nonperforming Loans in the Romanian Banking System: An Empirical Study with Reference to the Greek Crisis. Economics Research International, 1-13.

Wasiuzzaman, S., & Tarmizi, H.A.B.A.(2010). Profitability of Islamic banks in Malaysia: An Empirical Analysis. Journal of Islamic Economic Banking and Finance, 6, 53-68.

Zarrouk, H. (2012). Does Financial Crisis Reduce Islamic Bank’s Performance? Evidence form GCC Countries. Journal of Islamic Finance and Business Research, 1, 1-16.

How to Cite
Hui Kok, S., & Ismail, N. (2019). HOUSE PRICE CHANGES AND ISLAMIC BANK STABILITY: EVIDENCE FROM MALAYSIA. Journal of Islamic Monetary Economics and Finance, 5(1), 1-20.