The Mediating Effect of Products and Services on Growth Rate of Malaysian Islamic Financial System

By Nawaz, Huma; Bardai, Barjoyai et al. | Journal of Economic Cooperation & Development, January 1, 2018 | Go to article overview

The Mediating Effect of Products and Services on Growth Rate of Malaysian Islamic Financial System


Nawaz, Huma, Bardai, Barjoyai, Alkhawlani, Mohammad, Journal of Economic Cooperation & Development


1.Introduction

A number of market trends suggest a growing role for Islamic finance as a financial sector development. Islamic finance is a growing industry in many countries, such as Malaysia, the UAE, Turkey and Pakistan. Evidence of the validity of the development of Islamic finance is derived from the studies of (Ayaydin, 2016; Hannan, 1995; Sadeghi, 2008).

In Malaysia, an Islamic financial system theoretically could not be established as the only financial system due to many economic policies that are based on unethical decisions. Financial development determines the strength of economy and the country's standard of livelihood. Therefore, the determinants of financial growth need further evaluation for consistent progress in creating a policy decision for an economic system.

Very little literature can be found on the relationship between growth factors of Islamic financial institutions (IFI's) in Malaysia. This research attempts to cover and include this aspect to fill the research gap. Due to the implementation of the Shari'ah principles of Islamic finance, Islamic products and services are emerging as a more inspiring and resilient choice for ending the recession. An Islamic financial system, also called ethical financial system, is independent and has its own separate place in global financial markets.

In addressing the growth scenario of banking assets and equity funds, the performance of the Islamic banking system and Islamic equity funds(IEF) was examined in terms of conventional financial indicators at the international and national level, comparison with the conventional financial system growth indicators, and perceptions about the Islamic financial system(Figure 1).

In terms of the geographical and resources scenario, Shari'ah compliance infrastructure, financial growth indicators, and the central bank database assisted in understanding the critical growth determinants particular to Malaysian industry. In addition, the use of path analysis coefficients in this research may explore in depth analysis of the relationship between variables in the Islamic finance industry.

1.1.Hypothesis for statistical investigation

Ten hypotheses were developed in this research study. Each hypothesis was stated for a dataset of sample respondents, i.e., Malaysia. The four independent variables look at the effects of return, population, time interval and GDP (Gross domestic product) on Islamic banking assets and Islamic equity funds (mediating variable).

Hence, hypothesis i, hypothesis ii, hypothesis iii, hypothesis iv, hypothesis v, hypothesis vi, hypothesis vii and hypothesis viii investigate the relationship between banking assets and return, banking assets and population, banking assets and time interval, banking assets and the GDP rate, Islamic equity fund and return, Islamic equity fund and population, Islamic equity fund and time interval, Islamic equity fund and the GDP rate, respectively. To examine the mediating role of Islamic banking assets and Islamic equity funds on annual growth of the Islamic financial system, the direct effect of mediating variables on annual growth of Islamic finance will be tested in hypotheses xi and x.

2.Relevant Theories

In an Islamic financial system framework, all the principles, laws, and processes follow a commitment to Allah (^). Moral soundness is applied as a standard for the acceptance of financial transactions, contract, or instruments (Z. H. Khan & Watson, 2006). Methodology for theory-building in Islamic economics based on economic statements of the Quran, Hadith, and Sunnah lead to method that arrives at the real and undeniable meanings for development of the Islamic economic system (Khan, 2014)

Islamic values such as justice, equality, truth, faith, kindness, honesty, and responsibility has ensured Islamic Banking spreads competency over traditional interest rate spreads (Shaikh, 2013). Hassan & Lewis (2007) found that the absence of a uniform interpretation of Islamic law leads to viewed permissible activities by location and time. …

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