Modelling demand and supply of Islamic banking deposits

Abstract

AbstractThe purpose of the study is to assess the market of Islamic banking deposits. As banking intermediation ensures efficient allocation of excess capital, but stable availability of deposit resource helps banks to manage long‐term capital structure portfolio. Unlike conventional banks, Islamic banks also have to meet the Shari'ah requirements. This study works under the domain of Islamic economics and intends to explore the demand and supply model of deposits of Islamic banks using data from financial statements, World Development Indicators and Thomson Reuters. The results using panel feasible generalized least squares model with two‐way fixed effect showed that deposits are supply‐elastic and demand‐elastic with respect to returns to deposits. While other factors like inflation, money market rate and knowledge significantly affect supply of deposit and banking profitability and Islamic financial development significantly affect demand for deposits. This study concludes that the global Islamic banking deposit market is stable and converging hence, banks must ensure their relationship with price while devising a strategy to attract deposits.