The deposit determinants of Malaysian Islamic banking

The world of finance is fast developing. So, Islamic banks are obligated to innovate a set of techniques to mobilize deposits, giving priorities and risk preferences of various categories of depositors. This paper investigates the determinants of demand deposit in Islamic Banking System (IBS) in Malaysia. The study is conducted using co-integration test and vector error correction model (VECM) to determine the significance of interaction between the variables and bank deposit. The result shows a long-term relationship among the demand deposit, the Islamic bank’s return on deposit, conventional bank’s interest rate, inflation rate and country output. All remunerative deposits in Islamic banks, including saving deposits whereby banks provide free safety facility, shall be accepted on a profit and loss sharing (PLS) basis. The ratio of profit distribution between the bank and the depositor shall be agreed by the time of account opening subject to the condition of the Sharia, which is different from the ratio of capital; but losses have to be shared strictly in the ratio of capital. Islamic banking is said to be unique by its non-usury service products such as the Wadiah, Murabahah and Mudarabah. Islamic banking in Malaysia has a great potential for growth as Malaysia is an Islamic country and has a large Muslim population.