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Do profit and loss sharing (PLS) deposits also affect PLS financing? Evidence from Malaysia based on DOLS, FMOLS and system GMM techniques

Othman, Arshad Nuval and Masih, Mansur (2015): Do profit and loss sharing (PLS) deposits also affect PLS financing? Evidence from Malaysia based on DOLS, FMOLS and system GMM techniques.

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Abstract

The paper makes the initial attempt to understand the impact of investment or profit and loss sharing (PLS) deposits on mudarabah and musharakah or PLS financing offered by Islamic banks. The appropriate techniques such as DOLS, FMOLS and System GMM are used for the estimations and causality analysis. As a case study, the paper applies the techniques on panel data from Malaysia for two cross-sections, Islamic banks and Islamic banking schemes, with monthly frequency from January 2010 to January 2015. The results accept the null hypothesis of total investment deposits do not affect mudarabah and musharakah financing offered by Islamic banks. The results tend to indicate the presence of the positive long-run and short-run relationships between total investment deposits and mudarabah and musharakah financing but no causality from the former to the latter. Firstly, the positive long-run and short-run relationships may arise from the long-run and short-run influence of variables other than the microeconomic and macroeconomic variables specified by the empirical investigation. Secondly, the mudarabah and musharakah financing offered by Islamic banks appear driven by financing recipients’ preferences on the type of financing contract and not by total investment deposits, assuming the availability of supply of investment or PLS deposits more than or equal to the demand for mudarabah and musharakah or PLS financing. Thus, policymakers’ strategy on whether or not to promote PLS deposits to fund suppliers or PLS financing to fund demanders depends on the supply of the former and the demand for the latter.

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