DOES HOME FINANCINGPROMOTE AFFORDABILITY OF HOME OWNERSHIP IN MALAYSIA? AN EMPIRICAL ANALYSIS BETWEEN ISLAMIC AND CONVENTIONAL BANKS

The aim of this study is to examine the influence of home financing offeredby both Islamic and conventional banks and affordability of home ownership(as measured by House Price/GDP per capita) in Malaysia. At the same time,it attempts to assess the effects of employment and interest rate as measuredby Overnight Policy Rate (OPR) on home ownership affordability. The studyemploys the Auto Regressive Distributed Lag Model (ARDL) on yearly datafrom 2007 to 2014 in order to investigate the link between affordability andselected banking variables such as total home financing by Islamic banks andOPR. Data were extracted from the National Property Information Center(NAPIC) and Bank Negara Malaysia (BNM) Monthly Statistical Bulletin.This study finds that there are cointegrating relationships among all theselected variables at the selected lag length. Home financing of both Islamicand conventional banks were found to be significant in influencingAffordability of Home ownership in Malaysia. Consistent with thefundamentals of Islamic finance, our findings further suggest that OPR(interest rate) is less significant in determining home affordability in the caseof Islamic home financing compared to conventional home loan. This studyis an empirical attempt to analyze the effect of Islamic home financing as wellas conventional loan on affordability. The approach used is technically notnew, but it offers better insights into the applicability of Islamic finance inpromoting affordability of home ownership. This finding therefore warrants a more in-depth analysis to explore alternative home financing mechanisms such as rental rate pricing to promote home ownership affordability among low to medium income earners in Malaysia. JEL Classification: G21, R21