The determinants of islamic mudharabah interbank investment rate: Malaysia as a case study

Nur Aziah Aziz and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: This paper is intended to identify the determinants of Islamic Interbank Money Market (IIMM) rate in Malaysia with a specific focus on Mudharabah Interbank Investment (MII) transactions. The nature of Mudharabah outlined is that profit for this contract is based on Profit Sharing Ratio (PSR) pre-agreed between two contracting parties which are capital provider and enterpreneur. Basically, it should be based on real business case. On the other hand, IIMM is operated within the framework of financial transactions and governed by Bank Negara Malaysia (BNM). The main issue here is the justification of whether MII rate of return is moving in line with the movement of real economy rather than moving in parallel with any policized or quoted rate.Time series standard methodology will be applied in testing the relationships and causality between the factors affecting the determination of MII rate. Factors include real economy represented by Gross Domestic Product (GDP) and Consumer Price Index (CPI) while Overnight Policy Rate (OPR) and conventional interbank money market rate representing the policized and quoted rate. Another independant variable that may affect MII rate is the volumes of MII transaction. This study evidences the long-run relationship between the MII rate and various economic units, financial and economic variables. Findings suggest that MII rate are not influenced by the financial variables but mostly influenced by the economic variables which is in contrast with the nature of banking industries. It is strongly viewed that MII rate will move depending on the movement of the conventional money market rate which is also benchmarking against the overnight policy rate (OPR) but it is proven otherwise.

Keywords: Mudharabah interbank investment; overnight policy rate; VECM; VDC; Malaysia (search for similar items in EconPapers)
JEL-codes: C22 C58 E44 G21 (search for similar items in EconPapers)
Date: 2018-07-20
New Economics Papers: this item is included in nep-isf, nep-mac and nep-sea
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