Are deposit and investment accounts in Islamic banks in Malaysia interest-free ?

Abstract EN

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 risksharing 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.