Determinants of Islamic bank`s deposits in Indonesia : an ARDL modeling approach

Abstract

There are not many studies investigating the determinants of banks` deposit especially the Islamic banks` deposit. Thus the purpose of this study is to examine the relationship between the real level of deposit in Islamic banks in Indonesia and its measurable determinants such as real rate of return, real interest rate, number of Islamic banks` branches, and real income. We employ the Autoregressive Distributed Lag (ARDL) modeling approach to test the existence oflong-run relationship between the variables. This method was proposed by Pesaran and Shin (1995/1997). The main advantage of this approach is that it can be applied irrespective whether the underlying regressors are 1(0) or I( 1 ). The data used in this study is monthly data from March 2000 to February 2006 (72 observations). The result shows that there is a long-run relationship between real level of deposits and its predictors. Islamic banks` depositors are rational depositors who are influenced by the fluctuations of the real rate of return as well as the real interest rate. It also indicates that the displaced commercial risk does exist in Islamic banking system in Indonesia. This study also shows that the number of Islamic banks` branches and income have positive effect on the real level of deposit. The error correction term is found to be negative and significant. The finding gives more evidence that the model is cointegrated in the long-run.