In line with the government's policy to promote Malaysia as an international hub for Islamic banking and finance, the purpose of this paper is to evaluate the dynamic effects of both Islamic and conventional stock markets on foreign portfolio investments.
First, the paper explores the short and long‐run relationships between (FPI) and three markets, i.e. the goods, money, and securities market. Second, the paper attempts to examine the relative importance of the three markets in accounting for variations in FPI. Consistent with earlier studies, the goods market variable considered is real income (Y). The money market variables tested are the broad money supply (M2), treasury bill rate (TBR) and the US Federal Fund rate (FFR), while the security market is represented by both Kuala Lumpur Shari'ah Index (KLSI) and Kuala Lumpur Composite Index (KLCI).
The findings of the study indicate that among the three markets studied, the securities market in Malaysia (both conventional and Islamic) is the most significant market in attracting FPI into the economy. This implies that to a certain extent, the government's effort in promoting Malaysia as the international hub for the Islamic capital market has been successful.
The paper suggests that further efforts need to be enhanced in promoting Malaysia as the International hub for the Islamic banking and finance. The paper's findings shed some light on the policy ramifications pertaining to attracting foreign investors into the ICM in Malaysia and in moving towards a more globally competitive capital market.
