Determinants of Islamic and conventional deposits in the Malaysian banking system

Purpose - The objective of this study is to investigate the impact of selected economic variables on deposits level in the Islamic and conventional banking systems in Malaysia.Design methodology approach - Both long- and short-run relationships between these variables are measured by using advanced time series econometrics. These techniques are co-integration and error correction framework, which are conducted within the vector autoregression framework.Findings - By applying recent econometric techniques, we find determinants such as rates of profit of Islamic bank, rates of interest on deposits of conventional bank, base lending rate, Kuala Lumpur composite index, consumer price index, money supply and gross domestic product have different impact on deposits at both Islamic and conventional banking systems. In most cases, customers of conventional system behave in conformity with the savings behaviour theories. In contrast, most of these theories are not applicable to Islamic banking customers. Therefore, there is a possibility that religious belief plays an important role in the banking decisions of Muslim customers.Research limitations implications - As customers are sensitive to rewards, they receive from their deposits, rates of profit of Islamic system must at any time be similar to those of the conventional system. Finally, religious dimension can be considered as an important element to attract more people to deposit their funds in the Islamic system.Originality value - To the best of the authors' knowledge, this is the first attempt to empirically examine the depositor's behaviour in the Islamic banking environment.