Munich Personal RePEc Archive

Risk-sharing deposits in islamic banks: do interest rates have any influence on them?

Tariq, Anam and Masih, Mansur (2016): Risk-sharing deposits in islamic banks: do interest rates have any influence on them?

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It has been proven time and again, that Islamic banking performance tends to imitate that of conventional banks, especially since Islamic banks seem to be vulnerable to the same type of risks, whether it is because of monetary policy actions leading to changes in interest rates or other macroeconomic variables. We would like to take a closer look at this verdict and see if it truly holds true if we separate risk-based instruments of financing in Islamic banks and analyze their performance specifically. Our focus is on analyzing the level of impact of interest rates on risk-based deposits in Islamic banks. We use dynamic panel techniques in the form of difference GMM to come to the conclusion that separating risk-based from relatively fixed-rate instruments of financing can provide us with very different results. Our findings suggest that interest rates do not play a significant role in determining the level of deposits that are risk-based in nature and do not depend on a given and guaranteed rate of return. Based on this finding, we see that risk-based deposits and financing can prove to be the antidote that not only Islamic banks but the whole financial industry can think of, to deal with the detrimental effects of an interest-based system.

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