Impact of interest rate changes on performance of Islamic and conventional banks
This study investigates the impact of interest rate changes on the performance of Islamic and conventional banks in terms of demand for deposits and financing. Theoretically, changes in the interest rate would lead to a shifting effect between Islamic banks and conventional banks if customers are gu...
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| Main Authors: | , |
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| Format: | Article |
| Published: |
Malaysian Economic Association
2008
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| Subjects: | |
| Online Access: | http://eprints.um.edu.my/25644/ http://www.myjurnal.my/filebank/published_article/13427/Art3_2.pdf |
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| Summary: | This study investigates the impact of interest rate changes on the performance of Islamic and conventional banks in terms of demand for deposits and financing. Theoretically, changes in the interest rate would lead to a shifting effect between Islamic banks and conventional banks if customers are guided by the profit motive. Using monthly data from May 1999 to June 2007, it is found that Islamic bank customers behaved rationally and acted according to the profit motive. No shifting effect on deposits is evident possibly because customers are indifferent since returns on Islamic deposits move fairly closely to the interest rates of conventional deposits. Nevertheless, a shifting effect on financing is found. A rise in the base lending rate would induce customers to obtain financing from the Islamic bank and vice versa. This study concludes that because customers are profit motivated, Islamic banks in the dual system are exposed to interest rate risks despite operating on interest-free principles. |
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