Readdressing the question of how “Islamic” Islamic banks are: the dependency of Islamic bank rates on conventional rates and the impact of monetary policy

Mohamed Saeed, Shifa (2019) Readdressing the question of how “Islamic” Islamic banks are: the dependency of Islamic bank rates on conventional rates and the impact of monetary policy. [Dissertation (University of Nottingham only)]

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Abstract

Purpose – This paper aims to determine the relationship between Islamic bank rates and their conventional counterparts when monetary-policy-rates are included in the analysis. Hence, the paper aims to explain why there is a relationship between the Islamic bank rates and conventional-bank rates.

Design and Methodology – Using monthly data from January 2009 to April 2018, an ARDL approach is applied to identify the short-run and long-run relationships between different Islamic bank rates in Malaysia with their conventional counterparts as well as the monetary-policy rate. Further, to identify the robustness of the results, correlations between the 12-month rolling standard deviations of Islamic bank rates, conventional-bank rates and policy rates are examined. In conjunction with this, the Toda-Yamamoto procedure for Granger-causality is used to identify the causal direction between the rates.

Findings – The study finds that the Islamic bank rates in Malaysia are influenced by both the conventional rates as well as the Bank Negara Malaysia’s policy rate. A closer examination reveals that two factors contribute to the relationship between conventional rates and Islamic bank rates. One is the regulatory environment in which Islamic-banks operate in. Since the rates of Islamic-money-market instruments are linked to the overnight-policy-rate which is interest-based, the retail rates of Islamic-banks are not asset-linked nor interest-free. The other is the impact of profit-driven customers who are sensitive to differentials in rates offered by the two banking systems. As a result of their utility maximizing behaviour, Islamic-banks are forced to benchmark their rates to conventional rates.

Research Implications – The results of the study refutes the conception that Islamic-banks implicitly follow conventional-banks in their rate-setting behaviour simply because of the profit motive. Hence, the study demonstrates that the question of Islamic legitimacy of Islamic-banks need to be addressed in light of the regulatory environment in which Islamic-banks operate in. This could potentially provide more policy reforms that could uphold the integrity of Islamic banks.

Contribution – The study aims to contribute to the literature on the Islamic banks’ rate setting behaviour. On this note, this is the first study that has examined the relationship between Islamic bank rates and conventional-bank rates when the monetary-policy rate is included in the analysis.

Item Type: Dissertation (University of Nottingham only)
Depositing User: Library Services, UNM
Date Deposited: 08 Aug 2019 03:33
Last Modified: 07 May 2020 10:47
URI: http://eprints.nottingham.ac.uk/id/eprint/57214

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