Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Analysis of the Causality between Inflation Rate and
Mudharaba Time Deposits of Sharia Banks in Indonesia
Ferry Hadiyanto and Agung Haryanto
The aim of this paper is to test the relationship between inflatin rate
and mudharaba time deposit in sharia banking By using VAR model
with Ordinary Least Square (OLS) method, the result shows that there
is no effect between inflation rate and mudharaba time deposit
simultaneously. But the result indirectly supports the previous
evidences that interest rate gain is probably stiil major determinant
due to lesser effect of inflation rate to mudharaba time deposit
behaviour.
Keywords: Mudharaba Time Deposit, Inflation Rate, Vector Autoregressive
JEL Codes: G28, E31, C22
1. Introduction
Mudharaba time deposit funding is one of important product in sharia banking (Islamic
banking). It has been growing fund in the last ten years. This is caused that the deposit is
the largest share of bank products of funding. As in October 2011, The capitalization of
Islamic banking issued by Bank Indonesia (the central bank) shows the portion of deposit
mudharaba reached at around 60% of the total funding1 of Sharia Banking.
The important behavior of customer of Sharia Banks in Indonesia is due to the change in
preference and inflow funds from conventional banks. It can simply be explained that
creates massive liquidity of the banks. But as consequences the behaviour of consumers
would affect the other indicators of economy such as interest rate, inflation and even
economic growth simultaneously. Therefore it becomes important to know and understand
how the factors especially inflation involves in its relation to mudharaba time deposit in
Sharia Banks.
In general, customers in the sharia banking can be differentiated into three groups
according to an underlying motive of the customers that want to deposit funds (Hamzah. et
al, 2012), which are: (i). Loyalist groups of customers who have a spiritual motive where
customers save money in Sharia banks are encouraged by confidence factor that relates
to riba, acting takes benefit from speculative motive (interest rate gain). (ii). Rational
groups of customers are motivated to make profit from doing business. Willingness to
deposit due to bigger profit than interest rates gain of conventional banks. (iii). Floating
groups (Floating Mass) which customers can accept sharia and conventional systems
togetherly.
1
Islamic Banking Statistics, Oct 2011, Bank Indonesia
Ferry Hadiyanto, Faculty of economics and Business, Padjadjaran University, Indonesia
Agung Haryanto, Trisakti University, Indonesia
Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
The related empirical evidences show there are the inter-flow of deposit between Islamic
and conventional banks (Kasri and Kassim, 2009). Meanwhile, Abduh and Sukmana
(2012) also prove that interest rate gain is still dominant for bank consumers so that antiriba campaign is not fully followed. The above evidences confirm that the existence of
rational and floating costumers have important impact for sharia banks. Those are proven
the behavior of sharia bank sensitive to financial gain and could affect conventional banks
and the risk sharing of sharia banks, as well.
The other effect of the behavior of sharia bank consumers is whether inflation causes the
change of sharia banks deposit or not because of customer preferences. In Indonesia for
the past of ten years, the behavior of inflation was more volatile than interest rate. That
means in the changes of prices certainly would affect how people to allocate their wealth
or asset to be more profitable. In turn, that might be believed to affect the size of
mudharaba time deposit as well. This lead to be the phenomenon and hypothesis that is
going to be tested in this paper.
2. Literature Review
a. Inflation Rate
Inflation is defined as the rate of change in price continuously (Mankiw, 2011). Meanwhile,
Central Bank of Indonesia simply calculate inflation as a [ersistent, ongoing rise across a
broad spectrum of prices. The measurement of inflation bases on the level of Consumer
Pricwe Index (CPI). Changes in the CPI over time are indicative of price movements for
packages of goods and services consumed by the public
There are three commonly used price indexes to measure inflation are: (i). Consumer
Price Index (CPI), the price index which measures a group of prices of goods / services in
the household consumer level; (ii). Wholesale Price Index (WPI), the Wholesale Price of a
commodity is the price of transactions that occur between the first seller / wholesaler with
buyers / wholesalers in large quantities in the first market for the commodity; and (iii).
Gross Domestic Product Deflator (GDP) describes the measurement of the level of final
goods prices (final goods) and services produced within an economy (country). Generated
by dividing the GDP deflator of GDP on the basis of nominal prices to GDP at constant
prices2.
According to the calculation theoretically will lead to the framework analysis that
mechanism of intermediary function of sharia bank consider the change of inflation rate.
The higher inflation rate represent the bigger incentive of doing business that will attract
deposit mobilization.
b. Mudharaba
Mudharaba in Shar'iah, or Islamic law, refers to the payment of a specific amount of
money to a person who uses it for business and makes a profit from it, or an investment.
This form of a contract is permissible. Islamically, interest is forbidden. It is definitely
forbidden to take interest when loaning other people money meaning they search for nointerest loans or alternate forms of payment often offered by Islamic bank. Therefore, this
form of contract is much preferable.
2
Indonesia Statistics Office (BPS), Annual Report of Indonesia Statistics Book.
Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Technically, al-mudharaba is a business cooperation contract between two parties in
which the first party (Shahibul maal) provides the entire capital, while the other party
becomes the manager. Doing business profits according to the Mudharaba agreement set
in the contract, whereas the loss is charged to the owners of capital or shared between
the two parties, as long as it is not due to negligence of the management (Antonio, 2009).
Base on the Fatwa of The National Council of Sharia No. 03/DSN-MUI/IV/2000, dated 1
April 2000 on mudharabah deposit, provided the basis of sharia and the provisions of the
deposit as follows:
1. In this transaction, the customer acts as Shahibul maal or owner of the funds, and
Islamic banks as mudharib or fund manager.
2. In his capacity as mudharib, the bank can perform a variety of businesses that do not
conflict with Islamic principles and develop them, including Mudharabah with others.
3. Capital should be stated with the amount, in cash and not receivable.
4. Profit sharing ratio should be expressed in the form set forth in the contract and
account opening.
5. Banks as deposits mudharib cover operating costs by using a ratio advantage which
they are entitled.
6. Banks are not allowed to reduce the ratio of profits.
Finally, Mudharaba deposits are deposits of funds with mudharaba as owner of the funds
in which costumers entrust their funds to be managed entirely by sharia banks, with
appropriate sharing ratio agreed from the beginning. New mudharaba opening deposit
must be base on a contract or agreement that in the name and address of the customer,
and other attributes such as deposit amount, duration, ratio of profit sharing, profit sharing
payment and principal at maturity and the terms of other mudharaba deposits. Sharia
banks must have an agreement from the owner of the funds about the procedures for
granting benefit, ratio and calculation of the profit distribution and risks that may arise from
such sort of deposits.
3. The Methodology and Model
The variables were employed in this paper basically refer to the hypothesis that show the
causality between inflation rate and the value of mudharaba time deposits. The Two
variables are assumed will show and prove how the their relations are going to exist.
Therefore, Vector Autoregressive Regression (VAR) model is considered to be an
estimation model to test the hypothesis.
The variable of inflation is calculated for quarterly period, this means the inflation contains
the summation of three months inflation. On the other side, mudharaba time deposits are
taken from the Monthly Islamic Data Statistics that issued by Bank Indonesia.
The VAR Model is made including all the variables described above. Consider the units
used, deposit of mudharaba valued in billion rupiah. On the other side, inflation results in
percentage term. VAR model has a difference approach from large scale econometric
model. It focuses on the effect of the shocks or innovation (i.e, the residuals of estimated
reduced form of unrestricted VAR) which modeled shocks as exogenous changes in the
levels of policy variables, such as inflation.
Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Let Z = (p,mudharaba)’, where p is the inflation rate and mudharaba is the value of
mudharaba time deposits. Hence, the estimated equation is
∑
(1)
And for the impulse respond function which is taken to examine pattern of response the
vector of reduced form can be written as
∑
(2)
Ordinary Least Square estimation techniques (OLS) is employed to test the causality
between those two variables, even though it considers the each variable can be regressed
separately and use econometrics software Eviews-6. Data processing is intended to
produce the estimated value of the constant and coefficient of independent variables along
with the test statistic according to the expected level of confidence.
4. The findings
In aiming to analyse these two vector autoregressive model and constructed with one lag
observation show that there is no inter causality between inflation and mudharaba time
deposit. The models just prove that significantly effect is determined by its own variable.
The historical behaviour of variable highly influences the current level for inflation and
mudharaba time deposit as well.
This findings, once again, support that the dominant factor that cause the change of
mudharaba time deposit is probably interest rate or consumer income level. On the other
side, the inflation change, as already expected, is to follow its time movement. People look
at inflation change because of what happens in the past. The adaptive expectation is
considered still exist.
The result of VAR model can be seen as follows:
Table. Regression Result of VAR model
INFLASI
LN_MUDHAR
ABA
INFLASI(-1)
0.758282
(0.10543)
[ 7.19227]
-0.015620
(0.01612)
[-0.96915]
LN_MUDHARABA(-1)
0.768674
(0.62433)
[ 1.23120]
0.800084
(0.09544)
[ 8.38308]
C
-21.05071
(18.2916)
[-1.15084]
6.084647
(2.79622)
[ 2.17603]
R-squared
Adj. R-squared
F-statistic
S.D. dependent
0.632421
0.612000
30.96908
3.692993
0.666058
0.647506
35.90162
0.592294
Source: data estimation
Standard deviation in (.) and t-stat in [.]
Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
The extension of causality analysis between inflation and mudharaba time deposit is
explored using impulse respond function (IRF). The generalized IRF captures the dynamic
responses of dependent variables due to innovations in the variable itself. In the context of
this study, the IRF analysis reveals the reaction of the mudharaba time deposit and
inflation rate variables in the system.
Accumulated Response of INFLASI to Cholesky
One S.D. LN_MUDHARABA Innovation
10
8
6
4
2
0
-2
-4
1
2
3
4
5
6
7
8
9
10
Response of LN_MUDHARABA to Cholesky
One S.D. INFLASI Innovation
.20
.15
.10
.05
.00
-.05
-.10
-.15
-.20
1
2
3
4
5
6
7
8
9
10
Figure of Impulse Respond function of VAR model
Source: data estimation
Figure shows the generalized response of mudharaba time deposit to shocks of one
standard deviation of inflation, vice versa. The first figure confirms that the response of
inflation shows a persistent condition. A positive trends actually support that capitalization
of sharia bank then convert it into the economy will expand business activities. That is
believed to increase inflation rate due to higher aggregate demand. Meanwhile, the
second figure indicates that the response of mudharaba time deposit follows the standard
theory of money demand, when inflation increases will affect a decrease of value of saving
or time deposit. People will prefer cash instead of put their assets at the banks.
In other words, the customers of sharia banks, actually is “rational” depositors who are
driven largely by the return that they get from time deposits saving instead of follows to be
loyalist group and escape from conventional banks activities. The evidences also indirectly
Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
support how the customers are affected mostly by factors such as interest rate, income or
money supply like already found by Kasri and Kassim (2009), Abduh and Sukmana
(2012), Hamzah. et al (2012).
5. Summary
The causality between inflation and mudharaba time deposits using VAR model confirms
the previous evidences that there no significant relationship exist. Inflation rate tends to
follow its historical bahaviour that shows adaptive expectation of customers decision. On
the other side, mudharaba time deposits decrease is due to higher inflation put customers
to prefer cash instead of put their assets at the banks. Finally, this paper indirectly support
the previous evidences that found interest rate gain is still major effector in sharia banks
financing due to lesser effect of inflation.
References
Abduh, Muhamad and Sukmana, Raditya, 2012, Deposit Behavior in Indonesia Islamic
Banking: Do Crisis and Fatwa Matter?, On line at http://irep.iium.edu.my/24033/
Aggarwal, Rajesh K and Yousef, Tarik, 2000, Islamic Banks and Investment Financing;
Journal of Money, Credit and Banking; Feb 2000. 32.1. pg.93
Antonio, Muhammad Syafi’i. (2009). Bank Syariah : Dari Teori ke Praktek. Jakarta: Gema
Insani Press. p: 95.
Aryanto, Yudho. (2010). Analisis Faktor-Faktor Yang Mempengaruhi Deposito
Mudharabah Bank Syariah di Indonesia Tahun 2002.1 – 2009.12. Tesis. Fakultas
Ekonomi Program Magister Perencanaan dan Kebijakan Publik
Universitas
Indonesia Jakarta.
Bank Indonesia. Statistik Perbankan Indonesia. September 2011. On line at :http://www.
bi.go.id/web/id/Statistik/Statistik+Perbankan/Statistik+Perbankan+Indonesia/
Hamzah, Muhammad Zilal et al, 2012, The Effect Analysis Between Inflation Rate, Deposit
Interest Rate, and Profit Sharing Rate toward Mudharabah Time Deposit Rate,
International Conference on: Competitiveness of the Economy in the Global Market
University of Bung Hatta, Padang, West Sumatera, Indonesia.
Karim, Adiwarman Z.(2011). Segmentasi Pasar Perbankan Syariah. Online at http://
permodalanbmt.com/bmtcenter/?p=816, Date : 10/10/2011.
Kasri, Rahmatina A. and Salina Hj. Kassim.(2009). Empirical Determinants of Saving in
The Islamic Banks: Evidence From Indonesia.J.KAU: Islamic Econ. Vol. 22 No. 2, pp:
3-23
(2009
A.D./
1430
A.H.).
Electronic
copy
available
at:
http://ssrn.com/abstract=1685226
Mohd Hussin, Mohd Yahya et al, 2012, Macroeconomics Variables and Malaysian Islamic
Stock Market: A Time Series Analysis, Journal of Business Studies Quarterly, Vol 3,
No.4, pp: 1-13
Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Appendix
Vector Autoregression Estimates
Date: 02/20/13 Time: 08:00
Sample (adjusted): 2003Q2 2012Q4
Included observations: 39 after adjustments
Standard errors in ( ) & t-statistics in [ ]
INFLASI
LN_MUDHAR
ABA
INFLASI(-1)
0.758282
(0.10543)
[ 7.19227]
-0.015620
(0.01612)
[-0.96915]
LN_MUDHARABA(-1)
0.768674
(0.62433)
[ 1.23120]
0.800084
(0.09544)
[ 8.38308]
C
-21.05071
(18.2916)
[-1.15084]
6.084647
(2.79622)
[ 2.17603]
0.632421
0.612000
190.4983
2.300352
30.96908
-86.26720
4.577805
4.705771
7.278803
3.692993
0.666058
0.647506
4.451728
0.351652
35.90162
-13.01835
0.821454
0.949420
29.64285
0.592294
R-squared
Adj. R-squared
Sum sq. resids
S.E. equation
F-statistic
Log likelihood
Akaike AIC
Schwarz SC
Mean dependent
S.D. dependent
Determinant resid covariance (dof adj.)
Determinant resid covariance
Log likelihood
Akaike information criterion
Schwarz criterion
0.638643
0.544169
-98.81155
5.374951
5.630884
Date: 02/20/13 Time: 08:02
Sample (adjusted): 2003Q3 2012Q4
Included observations: 38 after adjustments
Trend assumption: Linear deterministic trend
Series: INFLASI LN_MUDHARABA
Lags interval (in first differences): 1 to 1
Unrestricted Cointegration Rank Test (Trace)
Hypothesized
No. of CE(s)
Eigenvalue
Trace
Statistic
0.05
Critical Value
Prob.**
None
At most 1 *
0.179851
0.154304
13.90284
6.368620
15.49471
3.841466
0.0856
0.0116
Trace test indicates no cointegration at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized
No. of CE(s)
Eigenvalue
Max-Eigen
Statistic
0.05
Critical Value
Prob.**
None
At most 1 *
0.179851
0.154304
7.534220
6.368620
14.26460
3.841466
0.4280
0.0116
Max-eigenvalue test indicates no cointegration at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):
INFLASI
-0.228500
0.208974
LN_MUDHARA
BA
-0.817607
-1.699032
Unrestricted Adjustment Coefficients (alpha):
D(INFLASI)
D(LN_MUDHA
RABA)
0.636653
-0.715535
0.136476
0.073879
1 Cointegrating Equation(s):
Log likelihood
-98.71647
Normalized cointegrating coefficients (standard error in parentheses)
LN_MUDHARA
INFLASI
BA
1.000000
3.578145
(2.89384)
Adjustment coefficients (standard error in parentheses)
D(INFLASI)
-0.145475
(0.08907)
D(LN_MUDHA
RABA)
-0.031185
(0.01359)