Analysis on reserve’s effectiveness using STATA statistical techniques

The objective of this research is to determine the effectiveness of a reserve maintained by Islamic banks in Malaysia in order to overcome the rate of return risk and the displaced commercial risk. These risks are unique to the operation of Islamic banks in Malaysia because of the competitive environment they face when they operate side by side the conventional banks. The reserve they maintain is called the Profit Equalisation Reserve (PER). The reserve’s function is to smooth the returns to be paid to the investment account holders and the shareholders. Although there are other controversial issues surrounding the practice of the reserve, the surmounting issue is how the reserve is practically utilized by the banks. In other words, how effective is the reserve. Employing STATA statistical techniques, i.e. Pool OLS, Regression using Robust Standard Deviation and Robust Regression by Cluster, this research has discovered the relationship between the reserve and profit payout smoothing, investment products and tenure of investment pools. These findings signal the effectiveness of the reserve.