In recent years, the financial crisis has led to a global impact, in turn affects the performance of the banking system. The extent of the impact in the countries which implemented the dual banking system might not be similar because of the characteristics of the banking system structure. Therefore, this paper tries to evaluate the impact of financial crisis and bank risks on deposit variation in Malaysia’s Islamic banks. The impact of the crisis will be evaluated by a dichotomous variable, which aims to assess level of deposits during the crisis period. Using 15 Islamic banks in Malaysia, spanning from 2008 to 2016, with 135 observations, panel data estimation technique is applied. Findings depict that the financial crisis has deteriorated the level of deposits in Islamic banks. It implies that Islamic banks might have faced a panic attack when the crisis happened. This resulted in banks’ inability to survive during the financial crisis as there are huge amount of withdrawals of the deposits. Two major bank risks which are credit and bank risks are used to test whether they can significantly variate the deposits in Islamic banks. They have revealed a clear indication to the losses in deposits Islamic banks in case undertaking risks. Further actions should be taken to by Islamic banks to overcome the impact of financial crises and the problem of bank risks.
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