Dual Banking Systems and Interest Rate Risk for Islamic Banks
AbstractIn introducing Islamic banking in Malaysia, the basic strategy was to replicate the products/ services offered by conventional banks. The successful implementation of such a strategy has meant that Malaysia today has a truly dual banking system. Islamic banks in Malaysia not only have product similarity with conventional banks but share the same overall economic environment and a common customer base. The ability of non Muslim customers/depositors to switch between the two banking systems, means that deposit / financing rates have to be similar – else give rise to arbitrage flows. The implication is that, though Islamic banks operate on interest free principles, the economic environment in a dual banking system inevitably exposes them to the problems of conventional banks; in particular interest rate risk. Using monthly data over the 10 year period 1994 – 2003, the paper argues that, paradoxical as it may seem, Islamic banks operating within a dual banking system may also be subject to interest rate risk.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 12763.
Date of creation: Dec 2004
Date of revision: Mar 2004
Publication status: Published in The Journal of Accounting, Commerce & Finance – Islamic Perspective 1.8(2004): pp. 1-42
Dual Banking Systems; Interest Rate Risk; Islamic Banks;
Find related papers by JEL classification:
- Z12 - Other Special Topics - - Cultural Economics - - - Religion
- G29 - Financial Economics - - Financial Institutions and Services - - - Other
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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- Obiyathulla Ismath Bacha, 2008.
"The Islamic inter bank money market and a dual banking system: the Malaysian experience,"
International Journal of Islamic and Middle Eastern Finance and Management,
Emerald Group Publishing, vol. 1(3), pages 210-226, September.
- Bacha, Obiyathulla I., 2008. "The Islamic Inter bank Money Market and a Dual Banking System : The Malaysian Experience," MPRA Paper 12699, University Library of Munich, Germany, revised Mar 2008.
- Etem Hakan, Ergeç & Bengül Gülümser, Arslan, 2011. "Impact of Interest Rates on Islamic and Conventional Banks: The Case of Turkey," MPRA Paper 29848, University Library of Munich, Germany.
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