Are The Profit Rates of the Islamic Investment Deposit Accounts Truly Performance Based? A Case Study of Malaysia

In this study we were motivated to ascertain whether the profit rates of the investment deposit accounts based on the profit and loss sharing contracts offered by the Islamic banks are truly based on the performance of the underlying assets or otherwise, by taking Malaysia as our case study. Given the facts that Islamic investment deposits are interest free in nature and that they are supposedly used in real economic activities, one would naturally expect that their returns are directly related to the actual performance of the investment activities undertaken by the Islamic banks. However, this notion stands to be statistically validated since the likelihood of Islamic finance, operating in the same financial markets of the conventional finance, to be influenced by the regulatory intervention and interest rate regimes is equally high. Using time series techniques, we have tried to establish whether there were any significant cointegration among profit rates of the Islamic investment deposit accounts and the selected interest rate regimes. Our test results reveal that, instead, they are heavily influenced by the interest rate regimes.