House Prices and Islamic Bank Stability in Indonesia: Evidence from Autoregressive Distributed Lag (ARDL) Model

ABSTRACT This study examines the effect of house prices on Islamic bank stability in the long run and their short run dynamic interactions with real output and interest rate for the case of Indonesia. As bank risks may response differently to the shock of house prices, the aggregate and disaggregate house price indices, namely, small house price indices, medium house price indices and large house price indices, are applied in the analysis. By employing autoregressive distribution lag (ARDL) test for co-integration, we find the presence of long run relationship between house prices, Islamic bank risk and macroeconomic variables. A long run relationship is also found for the medium and large-house prices’ indices. The estimated long run coefficient is found to be supportive to the deviation hypothesis. Furthermore, results from the impulse response functions (IRFs) and error correction mechanism (ECM) reflect the short run dynamic interactions between house prices and bank credit. The results from disaggregate analysis reveal that only small-house prices have the relationship with Islamic bank risk, and interestingly, the results support the deviations hypothesis. Our findings have important implications for bankers, monetary authority and investors in determining policy and business decisions especially in stabilizing house price for low income earners. Keywords: House prices; Islamic bank risk; NPF; Co-integration; ARDL ABSTRAK Kajian ini mengkaji kesan harga rumah ke atas kestabilan Bank Islam dalam jangka masa panjang dan interaksi dinamik jangka masa pendek dengan output benar dan kadar bunga untuk kes Indonesia. Oleh kerana risiko bank mungkin memberi tindak balas yang berbeza terhadap kejutan harga rumah, indeks harga rumah agregat dan bukan agregat iaitu indeks harga rumah kecil, indeks harga rumah sederhana dan indeks harga rumah yang besar, digunakan di dalam analisis ini. Dengan menggunakan ujian autoregressive distribution lag (ARDL) untuk kointegrasi, kami mendapati kehadiran hubungan jangka panjang di antara harga rumah, risiko bank Islam dan pembolehubah makroekonomi. Hubungan jangka panjang turut dijumpai untuk indeks harga rumah sederhana dan besar. Penganggaran pekali jangka masa panjang didapati menyokong hipotesis sisihan. Selanjutnya, keputusan daripada fungsi tindak balas impuls (IRF) dan mekanisme pembetulan ralat (ECM) mencerminkan interaksi dinamik jangka pendek antara harga rumah dan kredit bank. Hasil daripada analisis bukan agregat menunjukkan bahawa hanya harga rumah kecil mempunyai hubungan dengan risiko bank Islam, dan yang menariknya, hasilnya menyokong hipotesis sisihan. Hasil kajian ini mempunyai implikasi yang penting kepada pengurusa bank, pihak berkuasa kewangan dan pelabur dalam menentukan polisi dan keputusan perniagaan terutamanya dalam menstabilkan harga rumah bagi golongan berpendapatan rendah. Kata kunci: Kedai rumah; risiko Bank Islam; NPF; kointegrasi; ARDL