Did Conventional Interest Rate Influence Islamic Total Deposits? Evidence From January 2007 Till January 2019

Abdul Razak Abdul Hadi,Zalina Zainudin,Hafezali Iqbal Hussain

doi:10.5430/ijfr.v10n5p11

Abdul Razak Abdul Hadi, Zalina Zainudin + Show 1 more

Open Access

https://doi.org/10.5430/ijfr.v10n5p11

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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.

Highlights

Malaysia is one of the major oil-producing countries in South East Asia and it is intriguing to investigate to what extent that changes in crude oil price over the past five years could affect Malaysia exchange rate
In probing the directional relationship involving the variable of interest and its explanatory variable, the study assumes that West Texas Intermediate (WTI) influences Ringgit Malaysia (RM) exchange rate
From the empirical evidence presented, the study unveils the presence of long-term and short-term relationships between RM and WTI over full sample period

Summary

Introduction

Malaysia is one of the major oil-producing countries in South East Asia and it is intriguing to investigate to what extent that changes in crude oil price over the past five years could affect Malaysia exchange rate. There are several theories that explain the market mechanisms of the crude oil price; the terms of trade channel (Buetzer et al, 2016; Supian & Ab 2018), the wealth effect channel (Krugman, 1983), the portfolio reallocation channel (Bénassy-Quéré, Mignon, Penot, 2007) and international Fisher effect (Krugman, 2008; Suy, Choun & Chhay 2018). The portfolio effect on the currency are due to two factors: Oil exporters’ relative preferences for US dollar assets and the dependence of the United States on oil imports relative to the share of US exports to oil-producing countries (Bénassy-Quéré, Mignon, Penot, 2007; Buetzer et al, 2016; Suy, Chhay & Choun 2018).

Empirical Model

Empirical Findings

Conclusion