Economic determinants of islamic deposits: evidence from Malaysia

Azura Othman and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: Customer deposits is one of a bank’s source of funds used to finance its banking and financing activities. This paper seeks to study the determinants that affect the level of deposits in Malaysia in particular saving deposits of Islamic banks. Bank deposits are a major form of savings. Whilst there have been many studies done on the various theories related to savings in Malaysia and worldwide, this study is going to investigate a simplistic model of the factors that influence savings in the form of a bank savings account. The standard time series techniques are used to discern the determinants of Islamic deposits. The variables identified for the investigation of this study are the Islamic Deposits, Gross Domestic Product (GDP), money supply, the Kuala Lumpur composite index (KLCI), rate of return of Islamic deposits, base lending rate and the inflation rate. The results of this study not only identify the theoretical cointegrating relationship between the economic variables and Islamic bank deposits but also evidence the possible relationship bank deposits has with some of the determinants in this study. The results indicate that the direction of causation between Islamic savings and GDP, money supply as well as the rate of return on Islamic deposit tends to be positive, whereas the effect of money supply is insignificant. It has been found that Islamic saving deposits is inversely related to a change in KLCI, base lending rate and the inflation rate. The findings of this study provide a useful insight into the effects of the identified economic variables on the level of Islamic deposits which may enable Islamic banks in Malaysia to take proactive measures in its asset liability management.

Keywords: Islamic deposits; VECM; VDCs; Malaysia (search for similar items in EconPapers)
JEL-codes: C22 C58 E44 G21 (search for similar items in EconPapers)
Date: 2016-03-30
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