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The Behavior of Conventional and Islamic Bank Deposit Returns in Malaysia and Turkey

This paper examines the empirical behavior of conventional bank deposit rates and the rate of return on retail Islamic profit-and-loss sharing (PLS) investment accounts in Malaysia and Turkey, using monthly data from January 1997 to August 2010. The analysis shows that conventional bank deposit rates and PLS returns exhibit long-run cointegration and the time-varying volatility of conventional bank deposit rates and PLS returns is correlated and is statistically significant. The pairwise and multivariate causality tests show that conventional bank deposit rates Granger cause returns on PLS accounts. These findings have policy implications in terms of price stability and financial stability.

The analysis is based on monthly average data on conventional and Islamic
deposit rates in Malaysia and Turkey from January 1997 to August 2010.6
Wellestablished dual banking systems in Malaysia and Turkey provide the basis
for this study.7 The share of Islamic banks in banking system assets in Malaysia
increased from 7 percent in 2000 to over 20 percent in 2010. In Turkey, the share
of Islamic banks (known as “participation banks”) grew from 2.1 percent in 2000
to 4.3 ...