How Islamic Bank Set Financing Charges: A Survey of People’s Perception in Malaysia

Abstract

A number of recent studies find evidence that there is no significant difference between Islamic and conventional deposit rates. It was conjectured that this may be due to increasing dependent of Islamic banks on fixed rate products as opposed to profit-loss sharing products. Some authors go to the extent of arguing that Islamic banks are more interest- dependent than interest-fee. In an effort to provide a rational explanation to this issue, we surveyed public instrument was developed based on information obtained from interviews with bankers and survey of literature. Convenience sampling or the snowball survey method was used. Based on 401 usable responses, our result indicate that the most important factors considered in determining Islamic financing rate are “credit risk” and “cost of funds”. Other factors of importance include “operating costs”, “cost of capital” and “market interest rate”. Interestingly, the influence of conventional rates is not considered to be very important. Given that these factors are likely to be similar to those driving conventional rates, the reasons why Islamic rates are closely related to conventional rates is becoming clearer.