Kompenen Utama Sistem Kerajaan Malaysia

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WP/12/151

What’s in It for Me? A Primer on Differences between Islamic and Conventional Finance in Malaysia Olga Krasicka and Sylwia Nowak

© 2012 International Monetary Fund

WP/12/151

IMF Working Paper Asia and Pacific Department What’s in It for Me? A Primer on Differences between Islamic and Conventional Finance in Malaysia Prepared by Olga Krasicka and Sylwia Nowak1 Authorized for distribution by Sanjaya Panth June 2012 This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Abstract What attracts conventional investors to Islamic financial instruments? We answer this question by comparing Malaysian Islamic and conventional security prices and their response to macrofinancial factors. Our analysis suggests that Islamic and conventional bond and equity prices are driven by common factors. Likewise, especially in recent years, Islamic banks have responded to economic and financial shocks in the same way as conventional banks, suggesting that the gap between Islamic and conventional financial practices is shrinking. JEL Classification Numbers: E44, G15, G21 Keywords: Islamic banks; conventional banks; Sukuk; Malaysia Author’s E-Mail Address: olga.krasicka@doktorant.sgh.waw.pl; snowak@imf.org

1

This paper was prepared when Olga Krasicka was a summer intern at the International Monetary Fund. The authors would like to thank Sergei Dodzin for guiding this research; Ravi Balakrishnan, Rodrigo Cubero, Subir Lall, Ceyda Oner, and participants of seminars at IMF’s Asia and Pacific Department and Bank Negara Malaysia for helpful comments; and Dulani Seneviratne for invaluable research assistance.

2 Contents Page

I. Introduction ......................................................................................................................... 3 II. Malaysia’s Capital Markets and the Banking Sector: Stylized Facts ................................. 7 III. Islamic and Conventional Bonds and Stocks in Malaysia ................................................ 10 IV. Are Islamic Banks Safer and More Profitable Than Convetional Banks ......................... 15 V. Policy Implications and Conclusions ................................................................................ 17 References ............................................................................................................................... 19 Figures 1. Size of the Islamic Financial Services Industry .................................................................. 3 2. Malaysia: Size of the Banking Sector ................................................................................. 3 3. Malaysia: Size of the Local Currency Bond Market .......................................................... 8 4. Selected Asia: Foreign Holdings in Local Currency Government Bonds .......................... 8 5. Malaysia: Size of the Islamic Bond Market ........................................................................ 9 6. Stock Market Performance ................................................................................................. 9 7. Malaysia: Banking Sector Structure ................................................................................... 9 8. Malaysia: Monthly Bond Returns ..................................................................................... 11 9. Malaysia: Monthly Equity Returns ................................................................................... 11 10. Malaysia: Contributions of Common Factors to Bond and Equity Returns ..................... 11 11. Malaysia: Factor Loadings of the Common Economic Factor ......................................... 12 12. Malaysia: Loan...
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