Munich Personal RePEc Archive

Do islamic bank deposits depend on total islamic bank assets or the other way around ?

Izani, Izahairani and Masih, Mansur (2017): Do islamic bank deposits depend on total islamic bank assets or the other way around ?

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Abstract

Whilst the growth of the Islamic banking and finance industry has been remarkable, uncertainty and the lack of standardization in the legal and regulatory framework governing the Islamic finance industry may be impeding the growth of Islamic finance (Wisham et. al., 2012). There is no dearth in literature regarding the need for standardization in the Islamic finance industry for vis-à-vis banking/accounting standards, legal and regulatory frameworks and contractual terms to ensure that Islamic banking and finance continues to experience double digit growth rates, but could there be something of significance internally and within the four walls of Islamic banks themselves, something on an Islamic bank’s balance sheet, that can give us an insight on the growth of total aggregate assets of Islamic banks in Malaysia? This paper seeks to examine whether the growth of total aggregate assets of Islamic banks in Malaysia and the four significant components of Islamic banks’ assets and liabilities respectively (loans and advances, amount due from designated financial institutions, total equities and total deposits) have a long run relationship. To conduct the study, this paper carries out the necessary preliminary diagnostic tests and thereafter employs the Long Run Structural Model (LRSM), the Vector Error Correction Model (VECM) and Variance Decomposition (VDC) to test the presence/absence/nature the long run relationship between the said variables. As there are no known previous studies that have attempted to do this, this paper seeks to fill in this lacunae. Whilst we have found that there is one cointegrating relation between the above five variables, total aggregate assets is a highly exogenous variable. It is ultimately recommended that a more conducive regulatory and legal environment be created to grant Islamic banks the proper platform for it to increase its financings, other components of its asset side and eventually the total aggregate assets of Islamic banks in Malaysia.

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