[Credit Risk in Islamic Banking and Finance]

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Chapter 4: Discussion

Our facts and numbers on the monthly sequence of  Islamic  investment rates and accepted deposit rates were assembled from the Monthly Statistical Bulletin, which is released by the Bank Negara Malaysia. The sequence of monthly facts and numbers are aggregated and described founded on the mean rates over all economic institutions. The trying time span was from April 1995 to April 2004. The experiment dimensions was 109 for each time series. For robustness, we analyzed the rates supplied by two kinds of economic institutions: banks and  finance  companies. For each kind of organizations, we compared  Islamic  investment rates and accepted deposit rates on savings down payments as well as time down payments of diverse maturities, extending from one month to 12 months.

Table 3 presents the descriptive statistics for the experiment data. The abstract statistics, in specific, display that the  Islamic  investment rates are, on mean, considerably smaller than the accepted deposit rates. This finding is factual for both the banks and the  finance  companies. Furthermore, the instability and the minimum-maximum variety of  Islamic  investment rates are considerably smaller than those of accepted deposit rates, except for the buying into rates on  Islamic  banks' savings deposits. These outcomes are counterintuitive because the  Islamic  deposits, founded on the PLS idea, should have higher  risks  than accepted deposits.

A likely cause for the overhead outcomes is that, in perform, the comes back on  Islamic  deposits are administratively connected to the deposit rates suggested by conventional  banking.  The last pillar of Table 3, in specific, displays that the  Islamic  investment rates are highly correlated with the accepted deposit rates on a maturity-matched basis. The association coefficients, for demonstration, variety from 0.89 to 0.97 for the banks and from 0.88 to 0.94 for the  finance  companies. However, to direct out the likelihood of spurious associations, we next undertook some benchmark econometric checks to work out Granger causality, unit origin, and co integration.

The Granger causality check was conveyed out to work out if alterations in  Islamic  investment rates origin changes in the accepted deposit rates and if alterations in the accepted deposit rates origin changes in the  Islamic  investment rates. Table 4 accounts the outcomes of the pair-wise Granger causality test. The outcomes display that for each of the six maturity-matched situations, we will not decline the null hypothesis that alterations in  Islamic  investment rates manage not origin changes in the accepted deposit rates. On the other hand, we can decline the null hypothesis that alterations in the accepted deposit rates manage not ...