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Purpose The purpose of this study is to empirically analyze the role of sukuk in the monetary policy transmission mechanism through the asset price and exchange rate channels in the Indonesian economy. Design/methodology/approach Using the monthly data from January 2003 to November 2017, this study uses a multivariate vector error correction model causality framework. To examine the role of sukuk in the monetary policy transmission mechanism through the asset price channel, this study uses the variables of consumption, inflation, interest rates, economic growth and the composite stock price index. Meanwhile, to examine the role of sukuk in the monetary policy transmission mechanism through the exchange rate channel, this study used variables of inflation, interest rates, economic growth, foreign investment and exchange rate. Findings This study documented that sukuk has no causal relationship with inflation through asset price and exchange rate channels. Nevertheless, sukuk has a bidirectional causal relationship with economic growth through asset price and exchange rate channels. Sukuk is also documented to have a causal relationship with monetary policy variables of interest rate and stock prices through asset price and exchange rate channels. Finally, a unidirectional causality is recorded running from the exchange rate to sukuk in the exchange rate channel. Research limitations/implications The finding of independence of the sukuk market from interest rates provides evidence that the trading of the sukuk in Indonesia has been in harmony with the Islamic tenets. Practical implications The relevant Indonesian authorities need to enhance both domestic and global sukuk markets as part of efforts to promote the sustainability of Islamic capital market development in Indonesia. Originality/value To the best of the authors’ knowledge, this study is among the first attempts to empirically investigate the role of sukuk in monetary policy transmission through asset price and exchange rate channels in the context of the Indonesian economy.

This purpose of this study is to empirically investigate the investors overreaction and underreaction behaviours across the sectoral stock indices in the Indonesian stock market.,Nine weekly sectoral stock indices, comprising agriculture; mining; basic industry and chemicals; miscellaneous industry; consumer goods industry; property and real estate; infrastructure, utilities and transportation; finance; and trade, service and investment for the period 2009-2012 were analysed using the paired dependent sample t-test. To provide more insightful empirical evidence, the presence of market anomaly of investor’s overreaction and underreaction was examined on five observations with different vulnerable times.,The study documented that the overreaction anomaly was present among the winner portfolios in the entire sectoral indices. With the exception of the sectoral index of basic industry and chemicals on the loser portfolio, the study documented the presence of underreaction anomaly among all other sectoral indices in Indonesia. These findings implied that the investors might be able to gain significant profits investing their monies in the sectoral stock market in Indonesia by implementing the contrarian strategy.,Originality in this paper lies in the discussion of overreaction of investors in Indonesia where the stock market has great potential and has different characteristics and different problems from other regions.

Purpose – This purpose of this paper is to empirically examine the contribution of the Islamic banking and financial institutions (IBFIs) to economic growth in Malaysia. Design/methodology/approach – Focusing on the post-1997 economic turmoil, the paper relies on several time series tests, such as autoregressive distributed lag (ARDL), vector error correction model (VECM) and variance decompositions (VDCs). Findings – The paper documents significant role played by the IBFIs in Malaysian economy. In particular, significant unidirectional causality was found from the IBFIs development to economic growth, supporting the finance-growth led hypothesis or the supply-leading view. Research limitations/implications – The paper only focuses its analysis on the role of the IBFIs in the Malaysian economy and not the financial sector as a whole. Thus, the findings of this paper are indicative, but inconclusive for the entire financial sector in the country. Practical implications – Continuous efforts should be undertaken to promote the development of the Islamic banking industry due to its significant contribution to Malaysia’s economic growth by further improving the Islamic financial infrastructure, increasing the pool of human capital in the Islamic banking industry, providing conducive legal environment to the IBFIs and maintaining the Islamic financial sector stability. Originality/value – This paper is the first attempt to empirically assess the contribution of Islamic banking institutions in Malaysia using ARDL, VECM and VDCs.

PurposeThe main purpose of this paper is to examine cost efficiencies of the selected Islamic and conventional commercial banks over the period of 2006 to 2009 in Malaysia.Design/methodology/approachData envelopment analysis (DEA) was initially used, to investigate the cost efficiency of the Malaysian banking sector and followed by Tobit regression analysis determine factors influencing the efficiency of Islamic and conventional banks in Malaysia.FindingsThe DEA results reveal technical efficiency as the main contributor of cost efficiency for conventional commercial banks and allocative efficiency as the main contributor for cost efficiency of Islamic commercial banks. This indicates conventional commercial banks have been efficient in utilizing information technology and electronics. Islamic commercial banks conversely have been efficient in allocating and utilizing their resources. Additionally, scale efficiency is found to be the main source of technical efficiency for both Islamic and conventional commercial banks, denoting that size is important in improving bank efficiency. The results of Tobit regression analysis are twofold. First, it documents capitalization and bank sizes are positively and significantly associated to efficiency. Secondly, loan quality is found to be negatively and significantly associated to efficiency.Originality/valueThis paper contributes to the body of knowledge through its literature discussions on the efficiency of both Islamic and conventional banks and the effect of banks' specific characteristics on their efficiency.

Purpose – The purpose of this paper is to analyze the possibility of relying on the rental rate to price Islamic home financing product.Design/methodology/approach – By comparing two models consisting of either rental rate or lending rate (LR) and selected macroeconomic variables that could influence property value, the study focuses on the Malaysian data covering the period from 1990 to 2006. The study adopts several econometric time‐series analysis, such as the autoregressive distributed lag estimates, bi‐variate Granger causality, and multivariate causality based on the vector error‐correction model.Findings – The study finds consistent evidence that the rental price (RP) is a better alternative than the LR to price Islamic home financing product. In particular, the rental rate is found to be resilient to short‐term economic volatility, while in the long run, it is truly reflective of the economic fundamentals.Practical implications – This feature of the RP renders it as a fair pricing mechanism for th...

PurposeThe purpose of this paper is to provide empirical evidences on the impact of financial shocks on the Islamic banks vis‐a‐vis the conventional banks. Based on the Malaysian experience over two major financial crises, namely the 1997 Asian financial crisis and 2007 financial crisis, the study aims to test the validity of the proposition that the Islamic banks are more resilient to the financial shocks compared to the conventional banks.Design/methodology/approachFocusing on the Malaysian data covering three sub‐periods, namely, the 1997 Asian financial crisis period (July 1997‐September 1999), the non‐crisis period (October 1999‐June 2007) and the 2007 financial crisis period (July 2007‐September 2009), the study employs the impulse response functions and variance decomposition analysis based on the vector auto‐regression (VAR) method.FindingsThe results indicate that both the Islamic and conventional banking systems are vulnerable to financial shocks. This is contrary to the popular belief that the Islamic financial system is sheltered from the financial shocks due to its interest‐free nature.Research limitations/implicationsThe results of this study have important implications for the risk management practices of both the Islamic and conventional banks.Originality/valueThis paper contributes in providing the empirical evidence on the impact of financial shocks on the Islamic banks. To the authors' knowledge, there have been no studies comparing of the impacts of the two major financial crises on the Islamic banking sector.

PurposeThe purpose of this paper is to re‐examine the stock market integration and short‐run dynamic interactions between the Malaysian stock market and the stock markets of its major trading partners (the USA, Japan, Singapore, China and Thailand).Design/methodology/approachWeekly stock indices spanning from January 1992 to May 2008 is analysed using autoregressive distributed lag (ARDL) bound testing approach and vector autoregression (VAR) framework.FindingsStock markets of Malaysia and its major trading partners are found to be integrated. To some extent, it is found that trade does matter for stock market integration. Additional, geographical proximity and close relationship between the countries further contributes towards a greater integration between them. To move forward to a greater financial integration among these countries, trade liberalisation, including reduction or removal of trade and investment barriers would be necessary.Originality/valueThis paper is among the first attempts to use ARDL and VAR frameworks to examine integration among the stock markets of Malaysia and its major trading partners. The findings of the study would shed some empirical lights for the purpose of policy making.

Purpose – The purpose of this paper is to investigate the efficiency of selected conventional and Islamic unit trust companies in Malaysia during the period 2002 to 2005.Design/methodology/approach – The paper adopts Data Envelopment Analysis (DEA) to investigate efficiency, as measured by the Malmquist index, which is decomposed into two components: efficiency change and technical change indexes.Findings – The study indicates that technical efficiency is the main contributor to enhancing the efficiency of the Malaysian unit trust industry. In addition, the larger the size of the unit trust companies, the more inefficient the performance. In comparing the efficiency of unit trust companies, the study finds that some of the Islamic unit trust companies perform better than their conventional counterparts.Research limitations/implications – The study is limited to five Islamic unit trust companies. Thus, the findings of this study are indicative, but inconclusive for the unit trust industry as a whole.Practi...

PurposeThe purpose of this paper is to explore empirically the effects of the current financial crisis on the integration and co‐movements of selected stock markets of the emerging economies, namely Indonesia and Malaysia.Design/methodology/approachThe paper employs the standard time series technique and vector autoregressive framework.FindingsThe results of this paper support the general view that stock markets tend to show greater degree of integration or increased co‐movements during the crisis period, resulting in lesser benefit of diversification that can be gained by investors participating in these markets.Research limitations/implicationsThis paper only focuses on emerging equity markets of Malaysia and Indonesia.Practical implicationsThis paper reveals that unlike during the pre‐crisis period, the long‐run diversification benefits that can be earned by investors across the emerging equity markets of Indonesia and Malaysia during the crisis period tend to diminish.Originality/valueBy dividing the study periods into the pre‐crisis period and during the crisis period, it enables us to explore whether the cross‐market linkages between these markets change due to the crisis.

PurposeThe purpose of this paper is to explore the extent to which macroeconomic variables affect the Islamic stock market behavior in Malaysia in the post 1997 financial crisis period.Design/methodology/approachThe paper employs the latest estimation technique of autoregressive distributed lag (ARDL) model approach to cointegration.FindingsThe results suggest that real effective exchange rate, money supply M3, treasury bill rate (TBR) and federal fund rate (FFR) seem to be suitable targets for the government to focus on, in order to stabilize the Islamic stock market and to encourage more capital flows into the market. As for the interest rates and stock returns relationship, the paper finds that when interest rates rise either domestically (TBR) or internationally (FFR), the Muslim investors will buy more Shari'ah compliant stocks; thereby escalating the Islamic stock prices.Research limitations/implicationsThe results of this study are limited to the post 1997 financial crisis period until the beginning of the year 2006 for a small open economy, Malaysia.Practical implicationsThe paper reveals that both changes in the local monetary policy variables and in the US monetary policy as measured by the changes in the FFR have a significant direct impact on the Islamic stock market behavior in Malaysia.Originality/valueThe paper adopts the latest time series econometrics technique to test for cointegration, ARDL. And it is among the earliest attempts to investigate the long‐run effects of the macroeconomic variables changes either domestically or internationally on the Islamic stock market.

PurposeThe purpose of this paper is to empirically explore market integration among five selected Association of Southeast Asian Nations (ASEAN) emerging markets (Malaysia, Thailand, Indonesia, the Philippines and Singapore) during the pre‐ and post‐1997 financial crisis periods.Design/methodology/approachEmploys two‐step estimation, cointegration and generalized method of moments (GMM).FindingsThe study finds that the stock markets in the ASEAN region are cointegrated both during the pre‐ and post‐1997 financial crisis. However, the markets are moving towards a greater integration, particularly during the post‐1997 financial crisis. Finally, as measured by the error correction terms, except the emerging market of Indonesia, all other ASEAN markets appear to be the important bearers of short‐run adjustment to a shock in the long‐run equilibrium relationships in the region both during the pre‐ and post‐crisis periods.Research limitations/implicationsThe study only focuses on stock markets of the five founding members of ASEAN, i.e. Malaysia, Indonesia, Thailand, Singapore and the Philippines.Practical implicationsThe paper reveals that unlike during the pre‐crisis period, the long‐run diversification benefits that can be earned by investors across the ASEAN markets in the post‐crisis period tend to diminish.Originality/valueThe study is among the first to use two‐step estimation, cointegration and GMM to re‐examine market integration either in the emerging or developed markets.

PurposeIn line with the government's policy to promote Malaysia as an international hub for Islamic banking and finance, the purpose of this paper is to evaluate the dynamic effects of both Islamic and conventional stock markets on foreign portfolio investments.Design/methodology/approachFirst, the paper explores the short and long‐run relationships between (FPI) and three markets, i.e. the goods, money, and securities market. Second, the paper attempts to examine the relative importance of the three markets in accounting for variations in FPI. Consistent with earlier studies, the goods market variable considered is real income (Y). The money market variables tested are the broad money supply (M2), treasury bill rate (TBR) and the US Federal Fund rate (FFR), while the security market is represented by both Kuala Lumpur Shari'ah Index (KLSI) and Kuala Lumpur Composite Index (KLCI).FindingsThe findings of the study indicate that among the three markets studied, the securities market in Malaysia (both conventional and Islamic) is the most significant market in attracting FPI into the economy. This implies that to a certain extent, the government's effort in promoting Malaysia as the international hub for the Islamic capital market has been successful.Originality/valueThe paper suggests that further efforts need to be enhanced in promoting Malaysia as the International hub for the Islamic banking and finance. The paper's findings shed some light on the policy ramifications pertaining to attracting foreign investors into the ICM in Malaysia and in moving towards a more globally competitive capital market.