Publication:
Supply-side benchmark pricing in a dual banking system: evidence from Indonesian Islamic deposit rates
Abstract
Do depositors discipline Islamic banks in a dual-banking system by reallocating funds when Islamic returns fall below conventional rates, or does Islamic-conventional rate co-movement arise from bank-level pricing behaviour? Using 117 months of tenor-specific data from Indonesia (June 2014 to February 2024), we test the spread to-flow mechanism that the standard displaced-commercial-risk narrative presupposes. The Islamic-conventional spread does not predict aggregate Islamic deposit flows (?? = 0.002, p = 0.681; R� < 1%), and the null survives asymmetric specification, enriched controls, alternative spread definitions and tenor-matched flow regressions. A Shapley-Owen R� decomposition attributes 87�91% of the explained variation in Islamic rate changes to conventional benchmarks across the four tenors. The in-sample R� is low (3�5%), but the qualitative ranking is supported by a levels specification and is directionally consistent with a rolling out-of-sample comparison. A nonlinear ARDL model and local-projection impulse responses both show that Islamic rates respond faster to conventional rate cuts than to rate increases at the 3-month tenor; the evidence for asymmetry at other tenors is weaker and does not survive a change of method. We read the deposit-flow null as evidence against active aggregate depositor discipline rather than as a rejection of bank-level discipline operating through other channels. The benchmark-dominance and asymmetry results agree with supply-side benchmark pricing without uniquely identifying it. These findings caution against treating mudarabah-deposit pricing in a low-share dual banking system as evidence of risk-sharing, whether in monetary-transmission models or in governance frameworks.
Keywords
Deposit rate pass-through , Benchmark pricing , Dual banking system , Islamic banking , Displaced commercial risk , NARDL , Local projections
Citation
Mahomed, Z. (2026). Supply-side benchmark pricing in a dual banking system: Evidence from Indonesian Islamic deposit rates. Quarterly Review of Economics and Finance, 110, Article 102202. https://doi.org/10.1016/j.qref.2026.102202
Publisher
Elsevier Inc.
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