The Impact of Crisis and Macroeconomic Variables towards Islamic Banking Deposits

Abstract

Problem statement:The nature of Islamic banks is different from conventional banks which may lead to a different deposit behavior of their depositors. This study aims to analyze the dynamic effects of interest and profit rate changes, production level, inflation and financial crisis towards the fluctuation of total deposits in Malaysian Islamic banks. Approach: Using monthly data from January 2000 to December 2010, cointegration test and vector error correction model were utilized to uncover the dynamic relationship between macroeconomic variables and crisis with total deposit of Islamic banking. Results: The results show that changes in interest and profit rate as well as production growth has no significant effects. Meanwhile, inflation has negative effect on total deposits of Islamic banks which reflects the changes on depositors' consumption pattern during the recession. Interestingly, financial crisis is positively affecting total deposits in Islamic banks. Conclusion: This study provides evidence of general consumer sentiment and deposit behavior. It indicates that in general, due to the 1997/1998 financial crisis experience, bank depositors have trusted Islamic banking to be more resilient in facing financial crisis and hence, inflow of deposits to Islamic banks was happened during 2007/2008 financial crisis.

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“…However, other macroeconomics such as inflation and unemployment have a negative effect on performance when viewed from ROE. This is in line with the research of Abduh et al, 2011;Zeitun, 2012; and Al-Qudah and Jaradat, 2013. The right reason is this country because of the influencing inflation coming from changes in the benchmark exchange rate to the US Dollar, this implies that inflation is imported from abroad.…”

“…In addition to oil prices, a country's macroeconomic conditions can also have a positive impact on the performance of Islamic banking. In terms of macroeconomic variables, researchers have found a relationship between inflation, unemployment, and GDP on the performance of Islamic banking (Bashir, 2003;Haron and Azmi, 2004;Rasiah, 2010;Al-Tamimi, 2010;Ali et al, 2011;Abduh et al, 2011;Zeitun, 2012;Al-Qudah and Jaradat, 2013;Kanwal and Nadeem, 2013). However, relations in the gulf states council cooperation may be somewhat different because the benchmark exchange rate to the US dollar implies that inflation is imported from abroad.…”

A Comparative Analysis of Resilience of Islamic and Conventional Banks in Indonesia

“…They documented that the 1997-and 2008-financial crises have caused more deterioration of conventional banks than Islamic banks in Malaysia. Our findings also support the depositors' belief that Islamic banks were more resilient in facing a financial crisis that has attracted more inflow of deposits into the banks during the 2008 financial crisis (Abduh, Omar, & Duasa, 2011). Furthermore, Table 3 illustrates the correlation between the performances of conventional and Islamic banks over the study period.…”

“…However, the decline in the banking performances was severely experienced by the conventional banks by -2.28 points as compared to only -0.40 points experienced by the Islamic banks. This evidence confirms the more resilience, stability, and superiority of Islamic banks towards the economic crisis (Kassim & Majid, 2010;Abduh et al, 2011;Majid et al, 2014). Overall, our study shows that although the Islamic banks have recorded significantly lower financial performance than their conventional banking counterparts, but Islamic banks had experienced a much slower decline in their performances from the pre-to the post-2008 GFC.…”

Modelling demand and supply of Islamic banking deposits

“…Previous studies like (Abduh et al, 2011; Abduh & Omar, 2010; Awan & Bukhari, 2011; Erol & El‐Bdour, 1989; Haron & Azmi, 2008; Kasri & Kassim, 2009) focused on overall internal and external determinants of deposits, but have failed to distinguish between the dynamics of suppliers and demanders of deposits. The need to focus on demand and supply equilibrium‐based model as suggested by (Freixas & Rochet, 2008) and without the equilibrium state, economy, central bank and Islamic banks would not be able to identify the market stabilizing rate of total deposits and returns to deposits at prevailing economic conditions without it market might disappear for the case of non‐equilibrium or stay in cobweb if market is not allowed to settle to a steady state (Chiang & Wainwright, 2005) 3 and finally it can help in anticipating adjustments to changes in economy (Eaves & Schmedders, 1999).…”