Do deposits in islamic banks have an impact on equity market? evidence from Malaysia

The issue as to whether economic growth is largely influenced by the development of banking sector or by the financial markets is still debatable. Both the financial institutions and financial market play a vital role in contributing to the development of the economy but, do they have impact over one another? This study attempts to answer one critical question: Do deposits in Islamic banks have an impact on the equity market in Malaysia? Although many literature are on the linkages between the bank and the equity market, there is relative unavailability of literature relating the deposit in Islamic bank with the investment in the stock market. Using the standard time series techniques from the monthly statistical bulletin of Bank Negara Malaysia (BNM) from January 2001 to December 2016, it is found that the amount of total deposits in Islamic Banks would Granger-cause the Kuala Lumpur Composite Index. This shows that the deposits in Islamic Banking have influenced the equity market in Malaysia. Thus, it is essential for coordination and cooperation among the regulatory bodies such as Bank Negara Malaysia, Bursa Malaysia and Securities Commission to strike a balance between the capital market and the Islamic banking sector to grow simultaneously to achieve the best outcome.