Financing in Islamic Banking Scheme: Performance and Effect on Malaysian Output

The Islamic banking system is gaining momentum. Many conventional banks have started to open branches which operate in accordance with the Islamic Sharia'h principles under Islamic banking scheme (IBS) worldwide, including Malaysia. The Islamic banking system is expected to face strong competition not only from the Islamic banks but also from well-established conventional banks offering Islamic products and services. It directly influences output growth for those countries offering products and Islamic banking service. The general objective of this study is to analyze the financing supply in Islamic banking scheme: performance and effect on output in Malaysia during the period of 2003-2009. This study will use an empirical model and panel of state-level data to test whether changes in bank financing supply affect output. In this study, a general production function is used and for panel data, we have chosen the Im and Pesaran and Shin (1997; IPS hereafter), which are based on the well-known Dickey-Fuller procedure. For long-run relationship among real per capita GDP growth rates and the independent variables we used panel cointegration test with Fully Modified Ordinary Least Squares (FMOLS) Estimation. The tests suggested by Pedroni (1999, 2004). We can conclude that the result, financing in Islamic banking scheme in selected sectors in Malaysia has correlation and high significant level to output or GDP in Malaysia