Do the macroeconomic variables have any impact on the Islamic bank deposits?An application of ARDL approach to the Malaysian market

This paper makes an attempt to investigate the impact of selected macroeconomic variables on the level of deposits in the Islamic banking system. Malaysia is used as a case study. We apply ‘Auto – Regressive Distributive Lag’ model which has taken care of a major limitation of the conventional cointegrating tests in that they suffer from pre-test biases. Based on above rigorous methodology, we try to measure both long- and short-run relationships among these variables. By applying ARDL techniques, we find that the determinants such as, Inflation has strong impact on deposits of Islamic banking system while other macroeconomic variables GDP and Kuala Lumpur composite Index do not have significant impact. Most of the theories related to savings behaviour are not applicable to Islamic banking customers. Therefore, there is a possibility that religious belief might play an important role in the banking decisions of Muslim customers. The most relevant finding from the policy perspective is the significant negative effect of inflation on the Islamic banks’ saving deposits. Controlling inflation and thereby providing macroeconomic stability is essential for promoting Islamic banking