The Impact of Subprime Mortgage Crisis on Islamic Banking and Islamic Stock Market

This paper provides new empirical evidence on the impact of subprime mortgage crisis on Islamic banking and Islamic stock market in Malaysia. Monthly data of Islamic banking financing, Islamic banking deposit, Islamic stock market index and several macroeconomic variables covering the period of 2000 to 2011 are used in this study. Time series econometric methods such as cointegration test, Granger causality test and generalized impulse response functions are applied in examining the dynamic relationship of the variables. The empirical findings revealed that both the Islamic financing and Islamic stock market are cointegrated with other macroeconomic variables in both pre- and during crisis period. However, there is no cointegration for the Islamic deposit and macroeconomic variables in both periods. To some extent, with the exception of Islamic banking deposit, both the Islamic financing and Islamic stock market are vulnerable to financial crisis.