Reality of short-term causality of Islamic and conventional banking term deposit rates in Pakistan

Abstract

The purpose of this study is to find the empirical causal relationship between Islamic bank term deposit rates (IBTDR) and conventional bank term deposit rates (CBTDR) in the short-term. This study analyzes the short-term causal relationship between the term deposit rates (TDRs) for the time period of three years 2015 to 2018 on monthly data of IBTDR and CBTDR. Granger causality test, variance decomposition and impulse response function are applied to examine if there is any short-term causal relationship between the IBTDR and CBTDR. This empirical study establishes that the IBTDR are dependent on the CBTDR in the short-term. This research provides an insight for the customers of TDRs of the Islamic banking system. This study is not only a significant insight for the end-users but also for the regulators and researchers as it provides important empirical evidence. There has not been any study of this nature in Pakistan to identify the causality of the two-TDRs. This research expands the dynamics of research in the context of the banking sector. This could lead to further research on the reasons for causality.