The effect of financial liberalization towards the financial stability of Islamic banks in Malaysia

• Main Authors: Muhamad Arifin, Nur Afizah, Mohd Arifin, Noraini, Ramly, Zulkufly, Mohd Hashim, Maryam Jameelah, Abdul Aziz, Nor Farradila, Kamaralzaman, Surianor
• Format: Article
• Language: English
• Published: Universiti Teknologi MARA 2020
• Subjects: HG3368 Islamic Banking and Finance
• Online Access: http://irep.iium.edu.my/85539/7/85539_The%20effect%20of%20financial%20liberalization%20towards%20the%20financial%20stability.pdf; http://irep.iium.edu.my/85539/; http://abrij.uitm.edu.my/index.php
• Institution: Universiti Islam Antarabangsa Malaysia

Financial liberalization will affect the stability of the financial system due to excessive risk. Liberalization effort in Islamic banks players raises the issues of the ability of how Islamic banks can survive in the financial liberalization regime. Financial liberalization induced competition and thus impact on financial stability due to excessive risk taking. Malaysia is operating in dual financial system, the effect of mediating roles of competition and interest rate between financial liberalization is expected to vary to some extent due to shariah constraint. This paper aims to analyze the effect of financial liberalization and financial stability. Structural equation model – Partial least square (PLS-SEM) is used to analyze the research model with a comprehensive data set covering the Islamic banks over 1994 -2017. The empirical results denote a significant negative impact of financial liberalization on Islamic banks' financial stability in Malaysia. Lastly, it can be concluded that this study has an implication for policymakers and the banking industry