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The determinants of islamic mudharabah interbank investment rate: Malaysia as a case study

Author

Listed:
  • Aziz, Nur Aziah
  • Masih, Mansur

Abstract

This paper is intended to identify the determinants of Islamic Interbank Money Market (IIMM) rate in Malaysia with a specific focus on Mudharabah Interbank Investment (MII) transactions. The nature of Mudharabah outlined is that profit for this contract is based on Profit Sharing Ratio (PSR) pre-agreed between two contracting parties which are capital provider and enterpreneur. Basically, it should be based on real business case. On the other hand, IIMM is operated within the framework of financial transactions and governed by Bank Negara Malaysia (BNM). The main issue here is the justification of whether MII rate of return is moving in line with the movement of real economy rather than moving in parallel with any policized or quoted rate.Time series standard methodology will be applied in testing the relationships and causality between the factors affecting the determination of MII rate. Factors include real economy represented by Gross Domestic Product (GDP) and Consumer Price Index (CPI) while Overnight Policy Rate (OPR) and conventional interbank money market rate representing the policized and quoted rate. Another independant variable that may affect MII rate is the volumes of MII transaction. This study evidences the long-run relationship between the MII rate and various economic units, financial and economic variables. Findings suggest that MII rate are not influenced by the financial variables but mostly influenced by the economic variables which is in contrast with the nature of banking industries. It is strongly viewed that MII rate will move depending on the movement of the conventional money market rate which is also benchmarking against the overnight policy rate (OPR) but it is proven otherwise.

Suggested Citation

  • Aziz, Nur Aziah & Masih, Mansur, 2018. "The determinants of islamic mudharabah interbank investment rate: Malaysia as a case study," MPRA Paper 100263, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:100263
    as

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    References listed on IDEAS

    as
    1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    2. 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.
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    More about this item

    Keywords

    Mudharabah interbank investment; overnight policy rate; VECM; VDC; Malaysia;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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