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Islamic banking: Interest-free or interest-based?

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  • Chong, Beng Soon
  • Liu, Ming-Hua

Abstract

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.

Suggested Citation

  • Chong, Beng Soon & Liu, Ming-Hua, 2009. "Islamic banking: Interest-free or interest-based?," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 125-144, January.
    • Handle: RePEc:eee:pacfin:v:17:y:2009:i:1:p:125-144
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    References listed on IDEAS

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    1. 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.
    2. Paul S. Mills & John R. Presley, 1999. "Islamic Finance: Theory and Practice," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-28847-8, September.
    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. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
    5. 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 211-231, May.
    6. International Monetary Fund, 1989. "Islamic Banking: Experiences in the Islamic Republic of Iran and Pakistan," IMF Working Papers 1989/012, International Monetary Fund.
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