THE IMPACT OF CASH RESERVE RATIO AND LENDING RATE ON BANK’S LENDING: THE STUDY OF ISLAMIC BANKING IN MALAYSIA

Abstract

Purpose-This study was conducted to analyze the impact of cash reserve ratio and lending rate on the bank’s lending in the Islamic banking system of Malaysia. The study was conducted after great literature review and the gap was observed in the study because no one considered Cash Reserve Ratio in their study.

Design/Methodology-The data was collected from World Bank, central bank and annual reports of the organizations. The data of 15 Islamic banks were collected and all the observations were on annual basis. The data was gathered from 2008 till 2014 as per validity of the annual reports of the selected banks. The random effect of Hausman effect was used due to the nature of the data. The fixed effect P-value was 0.976 therefore random effect was taken in study.

Finding-The results prove the significance of both lending rate and cash reserve ratio. CRR is inversely associated with the bank’s lending while lending rate is directly related. The results were significant and the considerable impact of the core variables was found on the dependent variable. Significant impact of exchange rate and money supply was also observed in the study.