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Impact of Interest Rates on Islamic and Conventional Banks: The Case of Turkey

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  • Etem Hakan, Ergeç
  • Bengül Gülümser, Arslan
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    Abstract

    Identifying the impact of the interest rates upon Islamic banks is key to understand the contribution of such institutions to the financial stability, designing monetary policies and devising a proper risk management applicable to these institutions. This article analyzes and investigates the impact of interest rate shock upon the deposits and loans held by the conventional and Islamic banks with particular reference to the period between December 2005 and July 2009 based on Vector Error Correction (VEC) methodology. It is theoretically expected that the Islamic banks, relying on interest-free banking, shall not be affected by the interest rates; however, in concurrence with the previous studies, the article finds that the Islamic banks in Turkey are visibly influenced by interest rates.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29848.

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    Date of creation: Jan 2011
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    Handle: RePEc:pra:mprapa:29848

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    Keywords: Interest-free banking; monetary policy;

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    1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
    2. Habib A. Zuberi, 1992. "Interest Free Banking and Economic Stability," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 31(4), pages 1077-1087.
    3. Kia, Amir & Darrat, Ali F., 2007. "Modeling money demand under the profit-sharing banking scheme: Some evidence on policy invariance and long-run stability," Global Finance Journal, Elsevier, vol. 18(1), pages 104-123.
    4. Chong, Beng Soon & Liu, Ming-Hua, 2009. "Islamic banking: Interest-free or interest-based?," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 17(1), pages 125-144, January.
    5. Raditya Sukmana & Salina H. Kassim, 2010. "Roles of the Islamic banks in the monetary transmission process in Malaysia," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, Emerald Group Publishing, vol. 3(1), pages 7-19, April.
    6. Bacha, Obiyathulla I., 2004. "Dual Banking Systems and Interest Rate Risk for Islamic Banks," MPRA Paper 12763, University Library of Munich, Germany, revised Mar 2004.
    7. Khan, Mohsin S & Mirakhor, Abbas, 1990. "Islamic Banking: Experiences in the Islamic Republic of Iran and in Pakistan," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 38(2), pages 353-75, January.
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    Cited by:
    1. Rafi, Umar & Masih, Mansur, 2014. "Are Islamic Banks Truly Shariah Compliant? An Application of Time Series Multivariate Forecasting Techniques to Islamic Bank Financing," MPRA Paper 57711, University Library of Munich, Germany.

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