Home Islamic banking & Finance Statistical approaches identifying differences between Conventional and Islamic banking

Statistical approaches identifying differences between Conventional and Islamic banking


Conventional theories have identified several factors which motivate the savers to save in conventional banks, but conceptually Islamic banks are different from their conventional counterparts.

This makes us to make an attempt to empirically investigate whether the determinants of deposit in Islamic banks are significantly different from its conventional counterpart or otherwise. Using ARDL approach in statistics and signal processing is a way.

An autoregressive (AR) model is a representation of a type of random process; as such, it is used to describe certain time-varying processes in nature, economics, etc. The autoregressive model specifies that the output variable depends linearly on its own previous values and on a stochastic term (an imperfectly predictable term); thus the model is in the form of a stochastic difference equation.

Together with the moving-average (MA) model, it is a special case and key component of the more general ARMA and ARIMA models of time series, which have a more complicated stochastic structure; it is also a special case of the vector autoregressive model (VAR), which consists of a system of more than one interlocking stochastic difference equation in more than one evolving random variable.

Contrary to the moving-average model, the autoregressive model is not always stationary as it may contain a unit root. Enterprise risk management (ERM or E.R.M.) in business includes the methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives. ERM provides a framework for risk management, which typically involves identifying particular events or circumstances relevant to the organization’s objectives (risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress. By identifying and proactively addressing risks and opportunities, business enterprises protect and create value for their stakeholders, including owners, employees, customers, regulators, and society overall.

ERM can also be described as a risk-based approach to managing an enterprise, integrating concepts of internal control, the Sarbanes-Oxley Act, and strategic planning. ERM is evolving to address the needs of various stakeholders, who want to understand the broad spectrum of risks facing complex organizations to ensure they are appropriately managed. Regulators and debt rating agencies have increased their scrutiny on the risk management processes of companies.

To address the issues of Conventional and Islamic Banking, time series data from Malaysian banking system was used for analysis. According to our knowledge, this is the initial attempt to address this issue by testing both macro-economic and bank-specific factors in this particular time period (2007-2015). The results indicated that among the macro-economic variables; Industrial production index (GDP Growth) has strong impact on Islamic banking deposits while inflation (CPI) does not have significant impact on Islamic deposits.

Furthermore, among the bank-specific variables both interest rate and profit rate have strong impact on Islamic deposits. However, the most relevant finding from policy perspective is that depositors of Islamic banks in Malaysia are profit oriented, thus an increase or decrease in profit given to deposits will change their intention towards depositing in Islamic banks. Furthermore, since the customers of Islamic banks in Malaysia are divided into the categories of Muslim and non-Muslim, thus, any changes in conventional interest rate will affect the level of deposits in Islamic banks.

The implication of this study suggest that Islamic banks must invest in profitable projects and provide high profit rates to their depositors, which will help them keep their depositors for long time. These findings are also thought provoking for SBP and Islamic banks in Pakistan who normally rely on propagating that for going to “Janat” Islamic banking can be used. In fact they should have focused on creating awareness on Islamic banking and by providing better services and profit rates to its customers.