Analysis of Lending/Financing Rates and Profit Motive among Islamic Banking Customers

This study investigates the relationship between four terms with respect to Islamic financing, including Islamic financing / conventional loan amounts, base lending, and base financing rates. Theoretically, changes in interest rate would lead profit-motivated customers into substituting Islamic financing for conventional bank loans and vice versa. This study is conducted to identify the co-integrating and causality relationship between conventional loans, base lending rates and base financing rates on Islamic financing. This study also predicts whether there is any form of profit motive among Islamic financing customers. The data used were taken from Bank Negara Malaysia (BNM) from 2014 to 2019 on a monthly basis. To confirm that unit root is absent, a stationarity test employing the Augmented Dickey-Fuller (ADF) test was implemented. This then proceeded with various methods such as the Johansen-Juselius cointegration test, Granger Causality test, Vector Error Correction Model (VECM), as well as Impulse Response Function (IRF). This study comes to the conclusion that Islamic bank customers are possibly profit-driven and that the movement of interest rates will have an impact on their Islamic financing decision.