Did conventional interest rate influence Islamic total deposits? Evidence from January 2007 till January 2019

Abstract

This study is carried out to examine the influence of Malaysian conventional interest rate and narrow money supply (M1) upon the growth of Islamic total deposits (ITD) in Malaysia Islamic financial system. Even though it is a known fact that there is a clear separation between Islamic and conventional financial markets, the study is still pursued on the spirit of providing the latest empirical evidence. Since Malaysia is one of the biggest players in Islamic financial products, it is always the centre of attraction among the world investment community. Using 3-month Interbank rate (IBR) coupled with the deployment of Engle-Granger Cointegration Test (1987) as an estimation tool, the results from Error Correction model uncovers that ITD and IBR are not cointegated. There is also an absence of short-run relationship between these two variables. On the contrary, this bi-variate cointegration test proves the presence of equilibrium relationship between ITD and M1 but fail to support the dynamic relation between them. From the analysis of dynamic interactions via impulse-response functions and variance decomposition, the study reveals that ITD is the most exogenous variable of all. As such, ITD is unquestionably a leading economic indicator.