Interest Rate, Profit-Sharing, Inflation, and Money Supply Effects on Islamic Deposits in Indonesia An Error Correction Model
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Abstract
This study examines how the conventional interest rate, the profit-sharing rate, inflation, and the money supply affect Islamic bank deposits in Indonesia. Monthly secondary data for January 2009–December 2019 from the Financial Services Authority (OJK), Bank Indonesia, and Statistics Indonesia (BPS) cover Islamic commercial banks and Islamic business units. An Error Correction Model (ECM) separates short-run dynamics from the long-run equilibrium after Augmented Dickey–Fuller and residual-based cointegration tests. All variables are integrated of order one and cointegrated. The error correction term is negative and significant (−1.056), confirming a valid adjustment mechanism, but no regressor is significant in the short run. In the long run, the money supply has a positive effect at the 1% level and the profit-sharing rate a positive effect at the 10% level, whereas the interest rate and inflation have negative but insignificant coefficients. The regressors jointly explain 65.1% of the variation in deposits. Islamic deposits are driven mainly by system liquidity and, weaklier, by the distributed return, while conventional rates and price changes play a limited role. Implications for Islamic banks and regulators are discussed.
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References
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