Commercial property market and financing in Malaysia: comparative analysis between Islamic and conventional financing

Commercial property financing (CPF) offered by Islamic and conventional banks have been an issue of deliberation in the recent years due to interest rates fluctuations mostly during the economic crisis. Islam forbids relying on interest rates in all aspects of life including commercial property financing. Therefore, this study aims to identify the macroeconomic factors and financial factors that influence the financing of commercial property offered by Islamic
banks (CPFi) and conventional banks (CPFc) in Malaysia during 2010: Q1-2018: Q2. Using ARDL, ARDL-ECM, VDC, and IRF models, the short and long run relationship between macroeconomic factors and financial factors to commercial property financing in Malaysia was analyzed. Data were collected from BNM's monthly statistics bulletin, National Property Information Center, Department of Statistics Malaysia, and International Monetary Fund. The findings show that in the long run, the conventional financing affected by changes in macroeconomic factors (IPI, REER and OPR). Unlike conventional financing, Islamic financing is deem stable because not affected by OPR
changes. Surprisingly, both Islamic and conventional financing affected by interest rates (ALR) movement. This study proposed rental rates as alternative to the interest based financing as it is determined based on the real value of the property and the physical properties of the property. The proposed rental rate is not only free of the interest rate elements but fair in price as it is based on the real value of the property. Empirical evidence shows rental rates are not affected by macroeconomic factors. Therefore, this study proposes policy makers to consider rental rates as a mechanism in determining CPF and eliminating interest-based financing