Are Islamic Banks Truly Shariah Compliant? An Application of Time Series Multivariate Forecasting Techniques to Islamic Bank Financing
This paper analyzes the Shariah compliant nature of Islamic banks (IB) by using Time Series Multivariate Forecasting techniques to test the correlation and direction of causality between interest rates and IB financing . Islamic finance defines a 0% Interest rate, both on the asset and on the liability side. Thus, in a utopian Islamic financial system, any movement in interest rates should have no direct impact on any aspect of any Islamic bank. However, the supposition of IBs being genuinely Shariah compliant from a Credit Risk perspective has been challenged by many Shariah scholars. Using Malaysia as a test case, this paper measures changes in KLIBOR (Kuala Lampur Interbank Offer Rate) and tests them for correlations and directional causality with the IB Lending rate (used as a proxy measure for financing by Malaysian IBs). If a correlation and causality can be established between KLIBOR and financing by IBs, then it is an indication that IB’s may not be genuinely Shariah compliant. This research is original in that it attempts to relate an important issue of a fiqhi nature to data analysis, via some time series forecasting techniques. It also discusses the policy impacts of the results, and the subsequent risk faced by the Regulators in managing the Interest rate risks for a financial system structured on dual banking - Islamic and Conventional. The findings of the research tend to indicate a correlation and lead-lag causality relationship between Interest rate changes and Islamic bank financing.
|Date of creation:||27 Jul 2014|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Mansur Masih & Ali Al-Elg & Haider Madani, 2009. "Causality between financial development and economic growth: an application of vector error correction and variance decomposition methods to Saudi Arabia," Applied Economics, Taylor & Francis Journals, vol. 41(13), pages 1691-1699.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:57711. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.