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Dual Banking Systems and Interest Rate Risk for Islamic Banks

Author

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  • Bacha, Obiyathulla I.

Abstract

In 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.

Suggested Citation

  • 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.
  • Handle: RePEc:pra:mprapa:12763
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    File URL: https://mpra.ub.uni-muenchen.de/12763/1/MPRA_paper_12763.pdf
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    Citations

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    Cited by:

    1. 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, August.
    2. Seho, Mirzet & Alaaabed, Alaa & Masih, Mansur, 2016. "Risk-Sharing Financing of Islamic Banks: Better Shielded Against Interest Rate Risk?," MPRA Paper 82558, University Library of Munich, Germany.
    3. E. H. Ergeç & B. G. Arslan, 2013. "Impact of interest rates on Islamic and conventional banks: the case of Turkey," Applied Economics, Taylor & Francis Journals, vol. 45(17), pages 2381-2388, June.
    4. repec:spr:fininn:v:2:y:2016:i:1:d:10.1186_s40854-016-0028-7 is not listed on IDEAS
    5. repec:eco:journ1:2017-04-12 is not listed on IDEAS
    6. Tariq, Anam & Masih, Mansur, 2016. "Risk-sharing deposits in islamic banks: do interest rates have any influence on them?," MPRA Paper 71680, University Library of Munich, Germany.
    7. 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.
    8. Saba Mushtaq & Danish Ahmed Siddiqui, 2016. "Effect of interest rate on economic performance: evidence from Islamic and non-Islamic economies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-14, December.

    More about this item

    Keywords

    Dual Banking Systems; Interest Rate Risk; Islamic Banks;

    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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