Dependency of Islamic bank rates on conventional rates in a dual banking system: A trade-off between religious and economic fundamentals
Publication Type
Original research
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The dependence of Islamic bank rates on the conventional bank rate violates the religiosity principle and the fundamentals of an efficient market due to the possibility of arbitrage profit from the rate differences. This study tests such dependency in a dual banking system by considering monthly data from January 2009 to April 2018 on Malaysian banks using several ARDL tests, supplemented by robustness tests using a 12-month correlation of the rolling standard deviation and causality models based on the Toda-Yamamoto approach to investigate the short- and long-run dependency of rates. The study finds that Malaysia's Islamic bank deposit and financing rates are influenced by both the conventional and Bank Negara Malaysia's policy rates. Results imply that Islamic banks do serve profit-driven customers. We suggest that Islamic banks are forced to benchmark their rates to conventional rates because of the 

Journal
Title
International Review of Economics & Finance (IREF)
Publisher
Sciencedirect
Publisher Country
United States of America
Indexing
Thomson Reuters
Impact Factor
4.8
Publication Type
Both (Printed and Online)
Volume
86
Year
2023
Pages
1003-1021