Is there a Link between Profit Share Rate of Participation Banks and Interest Rate?[:] The Case of Turkey

Cem Korkut and Önder Özgür ()

MPRA Paper from University Library of Munich, Germany

Abstract: Today, the sensitive side of national economies is financial sector. The main reason for this sensitivity is financial crises. This situation has increased the demand and orientation for Islamic finance as a substitute for the modern financial system. The Islamic finance is discussed as a real solution to financial crises because the Islamic finance methods and applications depend on real economic activities. Both this case and the distance that is taken by Muslim countries in recent years has increased the share of Islamic banking/finance in the world. Thus, it has been a long debate in Islamic finance literature to investigate the presence of dependency between profit share rate settled by participation banks and deposit interest rate offered in conventional banking. In this study, variables that affect profit share rate of participation banks and deposit interest rate of conventional banks are examined over the period between January 2006 and May 2015 in Turkey. OLS method is constructed and empirical results are pointed out that interest rate on government security and foreign exchange rate are significantly effective on participation banks’ profit share rate. In addition, the profitability of conventional banks, government security, and foreign exchange rate are significantly effective on deposit interest rate settled by conventional banks. The main reason for this link between conventional interest rate and profit share rate arises with the domiance of murabahah, simple buy and sell with term sale transactions, at Islamic financial institutions. The interest rate is a benchmark for participation banks to determine the profit share rate. To get rid of this dependency, Islamic financial institutions may tend towards mudarabah transactions.

Keywords: Islamic banking and finance; participation banks; banking system; rate of returns; profit share rate; interest (search for similar items in EconPapers)
JEL-codes: E43 E44 G00 P43 P50 (search for similar items in EconPapers)
Date: 2017-06-01
New Economics Papers: this item is included in nep-ara, nep-cwa, nep-hme and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Economic Cooperation and Development 2.38(2017): pp. 135-158

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