Are Deposit and Investment Accounts in Islamic Banks in Malaysia Interest-Free?

30 Pages Posted: 8 Nov 2017

See all articles by Khairul Anuar

Khairul Anuar

Independent

Shamsher Mohamad

University Putra Malaysia - Graduate School of Management

Mohamed Shah

International Centre for Education in Islamic Finance (INCEIF)

Date Written: 2014

Abstract

Islamic banking and Finance (IBF) provides products and services guided by the Sharīʿah. Therefore, they are supposed to be different from their conventional counterparts. Islamic deposit rates should be different from conventional deposit rates. Islamic banking profit rates are supposedly less risky due to risk-sharing attribute embedded in their structure as compared to the Conventional banking interest rates on similar-risk investment products. This paper addresses this concern by examining the differences in the monthly fixed deposit rates of conventional and investment deposit rates of Islamic banks and finance companies in Malaysia for the period from January 1994 to December 2012 and determines the causality relationship between profit rates and interest rates on these investments. The findings suggest that profit rates of Islamic banks are significantly linked with interest rates of conventional banks. The findings also indicate that profit rates of Islamic banks and finance companies are affected by the movements of interest rates of conventional banks and finance companies respectively and not vice versa. The findings imply that there is a gap between Islamic banking theory and practice. Lack of infrastructure for full compliance and lack of stringent enforcement of regulatory requirements are possible reasons for such behavior of Islamic financial institutions in Malaysia.

Keywords: Islamic finance, Conventional rates of return compared to Islamic profit rates, Islamic finance companies, Sharīʿah-compliance of Islamic banks and finance companies

Suggested Citation

Anuar, Khairul and Mohamad, Shamsher and Shah, Mohamed, Are Deposit and Investment Accounts in Islamic Banks in Malaysia Interest-Free? (2014). Journal of King Abdulaziz University: Islamic Economics, Vol. 27, No. 2, 2014. Available at SSRN: https://ssrn.com/abstract=3066271

Khairul Anuar

Independent ( email )

No Address Available
United States

Shamsher Mohamad

University Putra Malaysia - Graduate School of Management ( email )

Selangor Darul Ehsan
Serdang, Selangor 43400
Malaysia

Mohamed Shah (Contact Author)

International Centre for Education in Islamic Finance (INCEIF) ( email )

Kuala Lumpur
Malaysia

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