Are profit rates of the islamic investment deposit accounts independent of the interest rates of conventional banks ?

Syahirah Zain and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: In theory, Islamic banking is different from conventional banking, since the former is supposedly based on a risk-sharing or profit-and-loss sharing paradigm, while the latter is based on interest rate and maximisation of wealth. However, many studies have claimed that in real practice, Islamic banking performance tends to imitate that of conventional banks. Through the standard time series techniques, this paper aims to study the impact of conventional fixed rates (CFR) and overnight policy rate (OPR) on the Islamic investment deposit profit rates (PR) of banks in Malaysia. This paper is also different from previous studies due to the inclusion of less tested variables such as, the ratio of Islamic deposits to total deposits (IDTD) as a proxy for the impact of market share on the determination of investment account rates, and the consumer price index (CPI) as a proxy of real economy on PR. Unexpectedly, it is found that PR is not strongly cointegrated with both CFR and OPR. It is still too soon to say that the prohibition of benchmarking and profit smoothing by Islamic Financial Services Act (IFSA) effective July 2015 might have had something to do with this. On the other hand, based on the VECM and VDC tests, PR is highly affected by the Islamic interbank rates. Based on this, policy makers could explore further on probable benchmarking between the banking sector and interbank money market within the Islamic financial segment.

Keywords: Islamic profit rates; interest rates; OPR; Islamic interbank rates; CPI; Malaysia (search for similar items in EconPapers)
JEL-codes: C22 C58 E44 G21 (search for similar items in EconPapers)
Date: 2018-12-18
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