Effect of interest rate on bank deposits: evidences from Islamic and non-Islamic economies

Banking sector is the backbone of any country’s economy and bank deposits are major tool of banking sector’s success. Bank deposits are also a major part and determinant of country’s saving. According to economic theories and practical considerations, interest rate is considered one of the major elements that can affect savings as well as bank deposits. But as we knows that in Islam interest is considered forbidden, So the basic purpose of this study is to know the fact that either religious factors have any effect on Muslim decision while saving in banks. We used panel least square with fixed effect model by using 55 non-Islamic and 15 Islamic countries data from 2005 to 2013 for this study. Results showed that in Islamic countries interest rate don’t have any impact on bank deposits however money supply and inflation do have positive significant impact. But in the case of non-Islamic countries interest rate and money supply both have positive significant impact on bank deposit however inflation seems to be insignificant. Hence there is need of Islamic banks in countries with more Muslim population and there should be different economic policies for Islamic countries as religious factor affects decision of Muslims.