Impact of interest rates on Islamic and conventional banks: the case of Turkey

Abstract

Identifying the impact of the interest rates upon Islamic banks is key to understand the contribution of such institutions to the financial stability, designing monetary policies and devising a proper risk management applicable to these institutions. This article analyzes and investigates the impact of interest rate shock upon the deposits and loans held by the conventional and Islamic banks with particular reference to the period between December 2005 and July 2009 based on Vector Error Correction (VEC) methodology. It is theoretically expected that the Islamic banks, relying on interest-free banking, shall not be affected by the interest rates; however, in concurrence with the previous studies, the article finds that the Islamic banks in Turkey are visibly influenced by interest rates. JEL classification: G21; E52

Are Profit Sharing Rates in Mudharabah Account Linked to Interest Rates? An Investigation on Islamic Banks in GCC Countries

“…Finally, the pairwise and multivariate causality tests revealed that CB deposit rates Granger cause returns on PLS accounts. Similar conclusion has been derived from the case of Turkish IBs by Ergeç and Arslan (2013). They found that IB loans and deposits are influenced by the fluctuations in the interest rates.…”

“…In other words, the bank operates a two-tier Mudaraba system in which it acts both as the Mudarib/fund-manager (agent) in the liability side and Rab-al-mal/capital-owner in the asset side (principal) (Lewis & Al-Gaoud 2001). Both the bank and the depositors share the risk of the contractual arrangements both as Mudarib and Rab-al-mal, ex-ante IB fixes the ratio of profit-sharing arrangement only (Ergeç & Arslan 2013). Efficiency, equity and stability of the banking system stemming from the practices of this two-tier silent partnership Mudaraba model are viewed as the advantages of IB over conventional banking (Iqbal et al 1998).…”

Macroeconomic shocks and Islamic bank behavior in Turkey

“…5 There are also concerns that Islamic banks face interest rate risk (Chong and Liu, 2009;Sukmana and Kassim, 2010;Ergeç and Arslan, 2013;Saraç and Zeren, 2015). Kassim et al (2009) revealed that Islamic banks are more sensitive to monetary policy changes than its conventional counterparts in a dual banking system as in Malaysia.…”

Dynamic relation between Islamic and conventional lending rates in Malaysia

“…Islamic bank operations are embedded in the interest-free banking framework. Therefore, theoretically it is expected that Islamic banks will not be influenced by interest rates (Ergeç and Arslan, 2013). The polemic on whether Islamic banks are mimicking conventional products is not confined to the conceptual level.…”

“…In addition, the pairwise and multivariate causality tests shows that changes in PLS returns are affected by conventional deposit rates. In another study, Ergeç and Arslan (2013) use a cointegration approach to analyse the influence of interest rates on Islamic bank rates in Turkey over the period 2005 to 2010. The researchers find that changes in the interbank overnight interest rates affect the deposits and loans not only of conventional banks but also of Islamic banks.…”