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Conventional and Islamic banks deposit rates as inflation hedges: the case of Malaysia

Siew Peng Lee (Department of Accounting, Universiti Tunku Abdul Rahman, Kajang, Malaysia)
Mansor Isa (Department of Finance and Banking, Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, Malaysia)

Journal of Economic and Administrative Sciences

ISSN: 1026-4116

Article publication date: 3 June 2019

Issue publication date: 3 June 2019

395

Abstract

Purpose

The purpose of this paper is to examine the extent to which conventional and Islamic bank fixed deposit rates can protect depositors against inflation in the Malaysia context.

Design/methodology/approach

Nominal interest rates are represented by commercial bank fixed deposit and investment bank fixed deposit rates. The authors use monthly data over the period 2000–2016. The authors apply the autoregressive distributed lag bounds testing methodology to test the existence of long-run relationship between nominal rates and inflation, and the error-correction model to test for the short-run dynamics.

Findings

The results show that the nominal interest rate and inflation are cointegrated for all the data series. The evidence indicates that all the fixed deposit rates, for both conventional and Islamic banks are effective inflation hedges in the long-run thereby supporting the Fisher hypothesis. There is no difference in the inflation hedging ability between conventional bank rates and Islamic bank rates. However, the authors find no evidence of the short-run relationship between interest rates and inflation for either bank.

Practical implications

Bank regulators should be concerned on the similarities in behaviour towards inflation between conventional and Islamic rates, given that the deposit rates for both banks are supposedly set based on different premises. Bank customers, they should deposit their money for the long horizon in order to protect themselves against inflation. Depositors worrying about inflation should be indifferent between conventional or Islamic as both banks provide similar inflation hedging characteristics.

Originality/value

The novelty of this study is in using the bank fixed deposit rates to study the Fisher effect in an emerging market and in comparing the conventional and Islamic bank rates in terms of their inflation hedging ability.

Keywords

Acknowledgements

The financial assistance from the Malaysian Ministry of Education (MOE) Fundamental Research Grant Scheme (FRGS) is gratefully acknowledged. The authors of this article have not made their research dataset openly available. Any enquiries regarding the dataset can be directed to the corresponding author.

Citation

Lee, S.P. and Isa, M. (2019), "Conventional and Islamic banks deposit rates as inflation hedges: the case of Malaysia", Journal of Economic and Administrative Sciences, Vol. 35 No. 2, pp. 128-139. https://doi.org/10.1108/JEAS-03-2018-0037

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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