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Islamic banking: 40 years later, still interest-based? Evidence from Malaysia

Listed author(s):
  • Gulzar, Rosana
  • Masih, Mansur

As Islamic banking comes of age 40 years after its beginning, scholars and academics are calling for a better version 2. Regulators in Malaysia and Pakistan are pushing the industry to adopt more Islamic contracts which live up to the spirits of Shariah. Malaysia, specifically, has launched the Islamic Financial Services Act 2013 (IFSA) as a step in this direction. To facilitate the transition, this study has two objectives; to test whether conventional rates is still cointegrated with Islamic banks’ profit rates in Malaysia and a ranking of the exogeneity of the factors that affect the profit rates. It uses a range of multivariate time series techniques namely the cointegration test, vector error correction model (VECM), cumulative sum (CUSUM) and cumulative sum of squares (CUSUMSQ) tests, variance decomposition (VDC), impulse response and persistence profiles. This study contributes to the literature through its use of the latest data (up to December 2014) and its rank of less-tested variables such as the ratio of Islamic deposits to total Islamic assets. The VDC ranking can also serve as a basis for comparison for the effects of IFSA. This research finds that Islamic profit rates are still cointegrated withconventional rates such as the overnight policy rate (OPR) and fixed deposit rates. Additionally, it is also led by Islamic banks’ dependency on deposits for funding and their market shares. These findings may give urgency to policy makers and practitioners to evolutionise current Islamic banking practices towards what is likely to be a more stable financial system.

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File URL: https://mpra.ub.uni-muenchen.de/65840/1/MPRA_paper_65840.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 65840.

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Date of creation: 15 Jul 2015
Handle: RePEc:pra:mprapa:65840
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  1. Serhan Cevik & Joshua Charap, 2015. "The Behavior of Conventional and Islamic Bank Deposit Returns in Malaysia and Turkey," International Journal of Economics and Financial Issues, Econjournals, vol. 5(1), pages 111-124.
  2. Chong, Beng Soon & Liu, Ming-Hua, 2009. "Islamic banking: Interest-free or interest-based?," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 125-144, January.
  3. Azmat, Saad & Skully, Michael & Brown, Kym, 2015. "Can Islamic banking ever become Islamic?," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 253-272.
  4. Beck, Thorsten & Demirgüç-Kunt, Asli & Merrouche, Ouarda, 2013. "Islamic vs. conventional banking: Business model, efficiency and stability," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 433-447.
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