Islamic rates of return and conventional interest rates in the Malaysian deposit market
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 25 November 2013
Abstract
Purpose
This paper aims to analyze Islamic rates of return, conventional interest rates in the Malaysian deposit markets, and Kuala Lumpur Interbank Offered Rate (KLIBOR) rates in the short-term money market from the view point of co-movement and transmission.
Design/methodology/approach
The non-stationary time series models such as cointegration and Granger causality tests are applied to analyze the daily data.
Findings
Islamic rates of return and conventional interest rates co-move in the Malaysian deposit market. The Islamic rates of return propel conventional interest rates in the three-, six-, and 12-month maturities. Islamic rates of return and conventional interest rates form a short-term money market with KLIBOR rates.
Research limitations/implications
The author analyzes econometrically the sample period from May 16, 2005 to January 12, 2012. This paper concentrates on the period after the development of Islamic banking in Malaysia.
Practical implications
Islamic and conventional deposit markets are competitive in Malaysia; in particular, the competition in the one-month deposit market is very keen. Islamic rates of return have more impact on the formation of short-term interest rates than conventional interest rates.
Originality/value
This paper makes three contributions to the related literatures. First, it uses daily data in the maturities of one month, three months, six months and 12 months for its analyses. Second, it uses the Granger causality method of Toda and Yamamoto to avoid the issue of the non-stationarity of the data. The results of the Granger causality tests in this paper are different from related literatures. Third, this paper focuses on the relationship of KLIBOR rates and Islamic rates of return, and of KLIBOR rates and conventional interest rates.
Keywords
Acknowledgements
JEL classification – E43, G10This paper is supported financially by Grant for Promotion of Niigata University Research Projects and Grant-in-Aid for Research Project from Institute of Humanities, Social Sciences and Education, Niigata University. This paper was presented at the following conferences: 2012 Western Economic Association International Conference in San Francisco, USA, 2012 Autumn Annual Meeting of the Japan Society of Monetary Economics in Kitakyushu, Japan and 2012 International Islamic Accounting and Finance Conference in Kuala Lumpur, Malaysia. The comments by Serkan Karadas (West Virginia University), Rika Nakagawa (Toyo University), Yutaka Kurihara (Aichi University), participants of the conferences and an anonymous referee are greatly appreciated.
Citation
Ito, T. (2013), "Islamic rates of return and conventional interest rates in the Malaysian deposit market", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 6 No. 4, pp. 290-303. https://doi.org/10.1108/IMEFM-11-2012-0113
Publisher
:Emerald Group Publishing Limited
Copyright © 2013, Emerald Group Publishing Limited