Empirical study on the causal relationship between Islamic and conventional deposit rate

Abstract

In theory Islamic banking is different from that of conventional banking; Islamic banking has a unique feature that is the profit and loss sharing (PLS) model. But in practice we have found bit resemblance between Islamic and conventional banking. In this study it has been tried to find the causal relationship between Islamic and conventional banking. For this purpose 3months, 6months, 1 year, 2years, 3years and 5years Islamic banking investment rates and conventional banking deposit rates have been collected. The unit root test that include ADF test for the stationarity of the data adopted first. Then co-integration determined between two variables (Islamic investment and conventional deposit rates), and the results were positive. And the direction of relationship found by Granger causality test. There was Granger Causality between different Islamic investment and conventional deposit rates. And it founds that the growth of Islamic banking in Pakistan is not due to Islamic banking PLS mode adoption, but that is mostly due to religious bases.