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Islamic banking: Interest-free or interest-based?

  • Chong, Beng Soon
  • Liu, Ming-Hua

A unique feature of Islamic banking, in theory, is its profit-and-loss sharing (PLS) paradigm. In practice, however, we find that Islamic banking is not very different from conventional banking. Our study on Malaysia shows that only a negligible portion of Islamic bank financing is strictly PLS based and that Islamic deposits are not interest-free, but are closely pegged to conventional deposits. Our findings suggest that the rapid growth in Islamic banking is largely driven by the Islamic resurgence worldwide rather than by the advantages of the PLS paradigm and that Islamic banks should be subject to regulations similar to those of their western counterparts.

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Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

Volume (Year): 17 (2009)
Issue (Month): 1 (January)
Pages: 125-144

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Handle: RePEc:eee:pacfin:v:17:y:2009:i:1:p:125-144
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  1. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
  2. Scholnick, Barry, 1996. "Asymmetric adjustment of commercial bank interest rates: evidence from Malaysia and Singapore," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 485-496, June.
  3. Chong, Beng Soon & Liu, Ming-Hua & Shrestha, Keshab, 2006. "Monetary transmission via the administered interest rates channel," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1467-1484, May.
  4. Heffernan, Shelagh A, 1997. "Modelling British Interest Rate Adjustment: An Error Correction Approach," Economica, London School of Economics and Political Science, vol. 64(254), pages 211-31, May.
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