Depositors` withdrawal behavior in Islamic Banking : a case study of Malaysia

Abstract

The present research is structured into three parts; (i) Islamic bank selection criteria; (ii) factors influence withdrawal behavior and (iii) the impact of banking crisis and macroeconomic variables’ shock towards the fluctuation of Islamic banks’ total deposit. The study attempts to enrich the understanding of withdrawal behavior of Islamic banking depositors in Malaysia utilizing different statistical approaches. Firstly, the research utilizes the Analytic Hierarchical Process (AHP) to delineate the most influencing factors that have the propensity to lead depositors to patronize Islamic banks. It was revealed that shariah compliance, profitability, and bank’s reputation are the most influencing factors. This suggests that violation of these factors can lead depositors to withdraw their money. Secondly, the research attempts to investigate the depositors’ withdrawal behavior from characteristics and psychological perspectives. To do this, six binary logistic regression models (logit) were developed and the theory of reasoned action (TRA) was also utilized. For logit models, thirteen independent variables and three dependent variables were incorporated for two different groups of depositors i.e. single account holders and multiple account holders. It was revealed that for all six models developed, the variable “main reasons” (X11, X12, and X13) were at all times found to be significant and the relationships were always as theorized. For instance, in terms of model 1, regardless of the group of depositors, the model consistently showed that depositors whose main reason in patronizing Islamic bank is “shariah compliance” will have higher propensity to withdraw their funds when it comes to their knowledge that their bank violates shariah principles. Other variables also appeared to significantly affect withdrawal behavior such as type of account, total amount of money deposited, awareness upon deposit insurance, type of bank, and ownership of the bank. Through structural equation modeling (SEM), good-fit indices from the TRA model also led to predicting the withdrawal behavior of depositors, whereby subjective norm plays a significant role in influencing the depositors’ withdrawal intention. The last part of the research examined the influence of macroeconomic performance towards the total deposit in Islamic banks, using vector error correction model (VECM). This part incorporates data span of ten years (i.e. January 2000 to December 2010) and uses variables such as Bank Negara policy rate (BLR), inflation, production index, interest rate, mudharabah deposit rate, and the crisis event. It was revealed that inflation, growth, rate of return have significant impacts upon total deposit fluctuations of Islamic banks in the long run. Also, the positive relationship of banking crisis event in the long run and in the short run showed that the general sentiments of depositors play important roles in depositors’ saving behavior and eventually can cause funds flow into Islamic banks during the banking crisis.