Interbank offered rates in Islamic countries: Is the Islamic benchmark different from the conventional benchmarks?

Nechi, Salem; Smaoui, Houcem

doi:10.1016/j.qref.2018.05.003

Cited by 10 publications

(11 citation statements)

References 12 publications

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“…Even the Islamic banking industries of the GCC countries, despite using the Islamic Interbank Rate (IIBR) for price reference, are also prone to the interest rate risk. This is because the IIBR too is closely associated with the conventional benchmark rates [ 26 , 31 , 33 , 44 – 46 ]. For example, Nechi and Smaoui [ 46 ] investigates a dynamic long run association between IIBR and conventional benchmark rate in the GCC countries including Kuwait, Bahrain, Qatar, UAE, and Saudi Arabia.…”

Section: Discussionmentioning

confidence: 99%

“…This is because the IIBR too is closely associated with the conventional benchmark rates [ 26 , 31 , 33 , 44 – 46 ]. For example, Nechi and Smaoui [ 46 ] investigates a dynamic long run association between IIBR and conventional benchmark rate in the GCC countries including Kuwait, Bahrain, Qatar, UAE, and Saudi Arabia. Their findings suggest that a significant long run relationship between the IIBR and the respective conventional benchmark rates of these countries except Kuwwait and Qatar.…”

Section: Discussionmentioning

confidence: 99%

“…For the effective pricing of Islamic banking products and decoupling of their rate from that of their conventional counterparts, Islamic banks have made efforts to create their own benchmark rate [ 46 ]. Consequently, Islamic banks came up with an Islamic benchmark rate called the Islamic interbank benchmark rate (IIBR).…”

Section: Literature Reviewmentioning

confidence: 99%

“…However, this benchmark rate has several shortcomings including its limited applicability, the lack of tools that the central banks and commercial banks may use to adjust liquidity and significant linkage of its spread with that of the conventional interest based benchmark rate e.g. LIBOR [ 26 , 31 , 45 , 46 ]. Thus, the efforts to develop an effective independent Islamic benchmark rate have failed [ 31 , 47 ].…”

Section: Literature Reviewmentioning

confidence: 99%

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Interest rate volatility and financing of Islamic banks

et al. 2022

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Despite a direct ban on charging interest, interest-based benchmarks are used as a pricing reference by a majority of Islamic banks, due in part to the absence of stable and widely- published alternatives. Benchmarking interest rate exposes Islamic banks to the problems of conventional banks, particularly the interest rate risk. Against this backdrop, the present study empirically examines the dynamic linkage between the interest rate volatility and the financing of Islamic banks. The empirical analysis is carried using evidence from the Islamic banking industry of Pakistan during the time period 2006–2020. The multivariate Johansen and Jusiles Co-integration test and Vector Error Correction Model (VECM) are used as the baseline econometric models. Moreover, the DCC-GARCH model is employed for robustness and ensuring the consistency of results. The results indicate that a significant long-term and short-term relationship exists between the interest rate volatility and the financing of Islamic banking industry providing significant evidence for co-movements and convergence. These findings suggest that paradoxical as it may seem, the financing of Islamic banks operating within a dual banking system is subject to interest rate risk, mainly due to benchmarking interest rate, which in-turn makes Islamic banks vulnerable to the rate of return risk and withdrawal risk. Moreover, corporate financing, in particular, is more vulnerable to interest rate risk.

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Section: Discussionmentioning

confidence: 99%

Section: Discussionmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

See 2 more Smart Citations

Interest rate volatility and financing of Islamic banks

et al. 2022

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show abstract

“…Cihak and Hesse (2010) observe that Islamic finance sets profit margins based on a reference rate of return linked to international benchmarks. Mohd and Azha (2019) , Nechi and Smaoui (2019) and Saeed et al. (2021) find connectedness between the Sharia-compliant interbank rates and the corresponding conventional interbank offer rates for Gulf Cooperation Council (GCC) countries and Malaysia.…”

Section: Literature Reviewmentioning

confidence: 99%