Dual Banking Systems and Interest Rate Risk for Islamic Banks

Obiyathulla Bacha

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Dual Banking Systems; Interest Rate Risk; Islamic Banks (search for similar items in EconPapers)
JEL-codes: G21 G29 Z12 (search for similar items in EconPapers)
Date: 2004-12, Revised 2004-03
References: View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published in The Journal of Accounting, Commerce & Finance – Islamic Perspective 1.8(2004): pp. 1-42

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