Islamic Financing and Bank Characteristics in a Dual Banking System: Evidence from Malaysia

An understanding of financing behaviour explains the performance of Islamic banks as an alternative to the conventional finance model as suppliers of capital for businesses and entrepreneurs. In the Islamic banking system, banks are suppliers of capital and not lenders unlike that stipulated in a traditional banking system. To date, Islamic banks have become the major source of capital in Malaysia and lending behaviour is an important policy variable. In this context, the paper examines the relationship between bank financing, bank financing rate and bank-specific characteristics in a dual banking system. The evidence suggests that the bank-specific characteristics are important for Islamic banking financing behaviour. The Islamic banks’ financing behaviour is consistent with behaviour of conventional banks in that the bank lending operates through banks depending on the size, and level of liquidity and capital. The findings also suggest that that there is no significant difference between Islamic bank financing and conventional bank lending behaviour with respect to interest rates. © Author