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

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  • Nechi, Salem
  • Smaoui, Houcem Eddine

Abstract

Motivated by the size and the growth of the global Islamic financial services industry, 17 Islamic Banks in six Islamic countries, in conjunction with Thompson Reuters, developed an Islamic Interbank Benchmark Rate (IIBR, hereafter) to address the Sharia compliance requirements of Islamic banks in the money market. This paper examines to what extent this newly introduced monetary tool differs from the conventional interbank rates used in the countries of contributing banks to the IIBR. We use cointegration analysis, Granger causality tests and Vector Autoregressive Models to investigate the dynamics and the inter-temporal linkages between the Islamic and conventional interbank benchmarks in five countries from Gulf Cooperation Council (GCC, hereafter) region. Results show that the IIBR exhibits a long-run relationship with the conventional rates and fails to be independently determined. Our findings advocate also that market conditions such as oil prices and inflation do not contribute to the dynamics between the IIBR and the conventional interest-based interbank benchmarks.

Suggested Citation

  • Nechi, Salem & Smaoui, Houcem Eddine, 2019. "Interbank offered rates in Islamic countries: Is the Islamic benchmark different from the conventional benchmarks?," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 75-84.
    • Handle: RePEc:eee:quaeco:v:74:y:2019:i:c:p:75-84
    DOI: 10.1016/j.qref.2018.05.003
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    Cited by:

    1. Saeed, Shifa Mohamed & Abdeljawad, Islam & Hassan, M. Kabir & Rashid, Mamunur, 2023. "Dependency of Islamic bank rates on conventional rates in a dual banking system: A trade-off between religious and economic fundamentals," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 1003-1021.
    2. Jardine A. Husman & Ali Sakti & Dahnila Dahlan & Imam Wahyudi Indrawan & Zaäfri A. Husodo & Nur Dhani Hendranastiti & Muhammad Budi Prasetyo & Wahyu Jatmiko, 2022. "On The Development Of The Islamic Benchmark Rate: An Indonesian Case," Working Papers WP/04/2022, Bank Indonesia.

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    More about this item

    Keywords

    Islamic finance; Islamic interbank benchmark rate; Conventional interbank rates; Cointegration; Granger causality; Vector autoregression model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G0 - Financial Economics - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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