IDEAS home Printed from https://ideas.repec.org/a/abd/kauiea/v27y2014i2no2p29-58.html
   My bibliography  Save this article

Are Deposit and Investment Accounts in Islamic Banks in Malaysia Interest-Free? هل ودائع وحسابات الاستثمار في البنوك الإسلامية في ماليزيا غير قائمة أو خالية من الفائدة ؟

Author

Listed:
  • Khairul Anuar

    (Manager in Islamic Financial Services Unit at the Monetary Authority of Brunei Darussalam)

  • Shamsher Mohamad

    (professor of finance at the International Centre for Education in Islamic Finance (INCEIF).)

  • Mohamed Eskandar Shah

    (Assistant Professor and Deputy Dean, Graduate Studies at INCEIF.)

Abstract

Islamic banking and Finance (IBF) provides products and services guided by the Sharīʿah. Therefore, they are supposed to be different from their conventional counterparts. Islamic deposit rates should be different from conventional deposit rates. Islamic banking profit rates are supposedly less risky due to risk-sharing attribute embedded in their structure as compared to the Conventional banking interest rates on similar-risk investment products. This paper addresses this concern by examining the differences in the monthly fixed deposit rates of conventional and investment deposit rates of Islamic banks and finance companies in Malaysia for the period from January 1994 to December 2012 and determines the causality relationship between profit rates and interest rates on these investments. The findings suggest that profit rates of Islamic banks are significantly linked with interest rates of conventional banks. The findings also indicate that profit rates of Islamic banks and finance companies are affected by the movements of interest rates of conventional banks and finance companies respectively and not vice versa. The findings imply that there is a gap between Islamic banking theory and practice. Lack of infrastructure for full compliance and lack of stringent enforcement of regulatory requirements are possible reasons for such behavior of Islamic financial institutions in Malaysia تقدم المصرفية الإسلامية والتمويل الإسلامي منتجات وخدمات متوافقة مع أحكام الشريعة الإسلامية. ولذا، فإنه يفترض أن تكون تلك المنتجات مختلفة عن نظيراتها التقليدية؛ إلا أنه في الآونة الأخيرة ظهرت مخاوف من أن البنوك الإسلامية لا تختلف جوهريًا عن نظيرتها التقليدية؛ حيث أن معظم ممارساتها تحاكي الممارسات المصرفية التقليدية وتتعامل بالربا في شكل مقنع. من الناحية النظرية. فعلى سبيل المثال ينبغي أن تكون نسب الأرباح على الودائع "الإسلامية" مختلفة عن أسعار الفائدة )الربا( على الودائع التقليدية. معدلات الأرباح في المصرفية الإسلامية من المفترض أن تكون أقل مخاطرة بسبب سمة المشاركة في المخاطر، تلك السمة المتضمنة في هيكلة المنتجات الإسلامية، مقارنة بأسعار الفائدة على المنتجات ذات المخاطر المماثلة في المصارف التقليدية. تتناول المقالة هذه القضية من خلال دراسة الفروق بين أسعار الفائدة على الودائع الشهرية الثابتة على الودائع الاستثمارية التقليدية، ونسب الأرباح على الودائع الاستثمارية في المصارف الإسلامية ومؤسسات التمويل الإسلامي في ماليزيا خلال الفترة من يناير 1994م حتى ديسمبر2012م، لتحديد العلاقة السببية بين معدلات الأرباح وأسعار الفائدة على هذه الاستثمارات. تشير النتائج إلى أن معدلات الأرباح في المصارف الإسلامية ترتبط بشكل كبير مع أسعار الفائدة في المصارف التقليدية على المديين القصير والبعيد. وقد لوحظت نتائج مماثلة لشركات التمويل. وتشير النتائج أيضا إلى أن معدلات أرباح المصارف الإسلامية، ومؤسسات التمويل الإسلامي تتأثر بتحركات أسعار الفائدة في المصارف التقليدية، ومؤسسات التمويل التقليدية وليس العكس. هذه النتائج تعني أن هناك فجوة بين النظرية والتطبيق في المصرفية الإسلامية. إن عدم وجود البنى الأساسية للالتزام الكامل وعدم الصرامة في تنفيذ المتطلبات التنظيمية هي الأسباب المحتملة لمثل هذا السلوك للمؤسسات المالية الإسلامية في ماليزيا.

Suggested Citation

  • Khairul Anuar & Shamsher Mohamad & Mohamed Eskandar Shah, 2014. "Are Deposit and Investment Accounts in Islamic Banks in Malaysia Interest-Free? هل ودائع وحسابات الاستثمار في البنوك الإسلامية في ماليزيا غير قائمة أو خالية من الفائدة ؟," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 27(2), pages 29-58, July.
    • Handle: RePEc:abd:kauiea:v:27:y:2014:i:2:no:2:p:29-58
    DOI: 10.4197/Islec.27-2.2
    as

    Download full text from publisher

    File URL: https://iei.kau.edu.sa/Files/121/Files/153875_27-2-02-Shaah.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.4197/Islec.27-2.2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Masih, Rumi & Masih, Abul M. M., 2001. "Long and short term dynamic causal transmission amongst international stock markets," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 563-587, August.
    2. Mahmood Yousefi & Sohrab Abizadeh & Ken McCormick, 1997. "Monetary stability and interest-free banking: the case of Iran," Applied Economics, Taylor & Francis Journals, vol. 29(7), pages 869-876.
    3. 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.
    4. 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.
    5. Khan, Feisal, 2010. "How 'Islamic' is Islamic Banking?," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 805-820, December.
    6. Bacha, Obiyathulla I., 2004. "Dual Banking Systems and Interest Rate Risk for Islamic Banks," MPRA Paper 12763, University Library of Munich, Germany, revised Mar 2004.
    7. Abdus Samad, 2004. "Performance Of Interest-Free Islamic Banks Vis-À-Vis Interest-Based Conventional Banks Of Bahrain," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 12(2), December .
    8. Kuran, Timur, 2005. "The logic of financial westernization in the Middle East," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 593-615, April.
    9. Mohamed ARIFF & Saiful Azhar ROSLY, 2011. "Islamic Banking in Malaysia: Unchartered Waters," Asian Economic Policy Review, Japan Center for Economic Research, vol. 6(2), pages 301-319, December.
    10. Kia, Amir & Darrat, Ali F., 2007. "Modeling money demand under the profit-sharing banking scheme: Some evidence on policy invariance and long-run stability," Global Finance Journal, Elsevier, vol. 18(1), pages 104-123.
    11. Amir Kia & Ali F. Darrat, 2003. "Modeling Money Demand under the Profit-Sharing Banking Scheme: Evidence on Policy Invariance and Long-Run Stability," Carleton Economic Papers 03-13, Carleton University, Department of Economics, revised Apr 2007.
    12. Amir Kia, 2002. "Interest Free and Interest-Bearing Money Demand: Policy Invariance and Stability," Working Papers 0214, Economic Research Forum, revised 09 May 2002.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sirajo Aliyu & Rosylin Mohd Yusof, 2016. "Profitability and Cost Efficiency of Islamic Banks: A Panel Analysis of Some Selected Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1736-1743.
    2. Hamza, Hichem & Saadaoui, Zied, 2018. "Monetary transmission through the debt financing channel of Islamic banks: Does PSIA play a role?," Research in International Business and Finance, Elsevier, vol. 45(C), pages 557-570.
    3. Nor, Amiruddin & Masih, Mansur, 2017. "Granger-causality between islamic banks and conventional banks: evidence from Malaysia," MPRA Paper 107064, University Library of Munich, Germany.
    4. Nor, Amirudin Mohd & Masih, Mansur, 2017. "Do Islamic banks lead or lag conventional banks? Evidence from Malaysia," MPRA Paper 79425, University Library of Munich, Germany.
    5. Abdullahi Osman Ali, 2021. "Impact of Monetary Policy Fluctuations on Conventional and Islamic Banks in Malaysia: Evidence from ARDL Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 11(1), pages 101-108.
    6. Rizkiah, Siti K. & Disli, Mustafa & Salim, Kinan & Razak, Lutfi A., 2021. "Switching costs and bank competition: Evidence from dual banking economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. E. H. Ergeç & B. G. Arslan, 2013. "Impact of interest rates on Islamic and conventional banks: the case of Turkey," Applied Economics, Taylor & Francis Journals, vol. 45(17), pages 2381-2388, June.
    2. Saba Mushtaq & Danish Ahmed Siddiqui, 2016. "Effect of interest rate on economic performance: evidence from Islamic and non-Islamic economies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-14, December.
    3. Malika Neifar & Sameh Charfeddine & Aida Kammoun, 2022. "Financial Performance of Islamic Versus Conventional Banks a Comparative Analysis for Jordan," International Journal of Economics and Financial Issues, Econjournals, vol. 12(6), pages 65-74, November.
    4. Uddin, Md Akther, 2016. "Reemergence of Islamic Monetary Economics: A Review of Theory and Practice," MPRA Paper 72081, University Library of Munich, Germany.
    5. Gulzar, Rosana & Masih, Mansur, 2015. "Islamic banking: 40 years later, still interest-based? Evidence from Malaysia," MPRA Paper 65840, University Library of Munich, Germany.
    6. Meslier, Céline & Risfandy, Tastaftiyan & Tarazi, Amine, 2017. "Dual market competition and deposit rate setting in Islamic and conventional banks," Economic Modelling, Elsevier, vol. 63(C), pages 318-333.
    7. Mohd. Yusof, Rosylin & Bahlous, Mejda & Tursunov, Hamza, 2015. "Are Profit Sharing Rates of Mudharabah Account Linked to Interest Rates? An Investigation on Islamic Banks in GCC Countries," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 49(2), pages 77-86.
    8. Zulkhibri, Muhamed & Sukmana, Raditya, 2016. "Financing Channel and Monetary Policy: Evidence from Islamic Banking in Indonesia," Working Papers 2016-1, The Islamic Research and Teaching Institute (IRTI).
    9. Abdus Samad, 2016. "Are Islamic Banks’ Non-bank Deposits Shock Resistant? A Comparison with Conventional Banks: Evidence from Bahrain," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 6(5), pages 1-6.
    10. Rouetbi, Marwene & Ftiti, Zied & Omri, Abdelwahed, 2023. "The impact of displaced commercial risk on the performance of Islamic banks," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    11. Ahmet F. Aysan & Mustafa Disli & Huseyin Ozturk & Ibrahim M. Turhan, 2015. "Are Islamic Banks Subject To Depositor Discipline?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 60(01), pages 1-16.
    12. Aysan, Ahmet F. & Disli, Mustafa & Duygun, Meryem & Ozturk, Huseyin, 2018. "Religiosity versus rationality: Depositor behavior in Islamic and conventional banks," Journal of Comparative Economics, Elsevier, vol. 46(1), pages 1-19.
    13. Muhamed Zulkhibri & Raditya Sukmana, 2017. "Financing Channels and Monetary Policy in a Dual Banking System: Evidence from Islamic Banks in Indonesia," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 46(1), pages 117-143, February.
    14. Abdus Samad & Mohammad Ashraful Ferdous Chowdhury, 2017. "Islamic Banks' Return on Depositors and Conventional Banks' Deposit Interest: Is there Causality? Evidence of Causality from Bangladesh," International Journal of Economics and Financial Issues, Econjournals, vol. 7(5), pages 432-439.
    15. Tariq, Anam & Masih, Mansur, 2016. "Risk-sharing deposits in islamic banks: do interest rates have any influence on them?," MPRA Paper 71680, University Library of Munich, Germany.
    16. Hamza, Hichem & Saadaoui, Zied, 2018. "Monetary transmission through the debt financing channel of Islamic banks: Does PSIA play a role?," Research in International Business and Finance, Elsevier, vol. 45(C), pages 557-570.
    17. Saibal Ghosh, 2020. "Access to and use of finance in India: does religion matter?," Indian Economic Review, Springer, vol. 55(1), pages 67-92, June.
    18. Uddin, Md Akther, 2019. "Islamic Monetary Economics: Insights from the Literature," MPRA Paper 102887, University Library of Munich, Germany.
    19. Ahmet F. Aysan & Mustafa Disli & Huseyin Ozturk, 2018. "Bank lending channel in a dual banking system: Why are Islamic banks so responsive?," The World Economy, Wiley Blackwell, vol. 41(3), pages 674-698, March.
    20. Samad, Abdus, 2018. "Is there any causality between Islamic banks’ return on depositors and conventional banks’ deposit interest: Evidence of causality from Bahrain’s financial market," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(4), pages 894-912, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:abd:kauiea:v:27:y:2014:i:2:no:2:p:29-58. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: King Abdulaziz University, Islamic Economics Institute. (email available below). General contact details of provider: https://edirc.repec.org/data/cikausa.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.