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Interest rate volatility and financing of Islamic banks

Despite a direct ban on charging interest, interest-based benchmarks are used as a pricing reference by a majority of Islamic banks, due in part to the absence of stable and widely- published alternatives. Benchmarking interest rate exposes Islamic banks to the problems of conventional banks, partic...

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Autores principales: Nouman, Muhammad, Hashim, Maria, Trifan, Vanina Adoriana, Spinu, Adina Eleonora, Siddiqi, Muhammad Fahad, Khan, Farman Ullah
Formato: Online Artículo Texto
Lenguaje:English
Publicado: Public Library of Science 2022
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9321439/
https://www.ncbi.nlm.nih.gov/pubmed/35881655
http://dx.doi.org/10.1371/journal.pone.0268906
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author Nouman, Muhammad
Hashim, Maria
Trifan, Vanina Adoriana
Spinu, Adina Eleonora
Siddiqi, Muhammad Fahad
Khan, Farman Ullah
author_facet Nouman, Muhammad
Hashim, Maria
Trifan, Vanina Adoriana
Spinu, Adina Eleonora
Siddiqi, Muhammad Fahad
Khan, Farman Ullah
author_sort Nouman, Muhammad
collection PubMed
description Despite a direct ban on charging interest, interest-based benchmarks are used as a pricing reference by a majority of Islamic banks, due in part to the absence of stable and widely- published alternatives. Benchmarking interest rate exposes Islamic banks to the problems of conventional banks, particularly the interest rate risk. Against this backdrop, the present study empirically examines the dynamic linkage between the interest rate volatility and the financing of Islamic banks. The empirical analysis is carried using evidence from the Islamic banking industry of Pakistan during the time period 2006–2020. The multivariate Johansen and Jusiles Co-integration test and Vector Error Correction Model (VECM) are used as the baseline econometric models. Moreover, the DCC-GARCH model is employed for robustness and ensuring the consistency of results. The results indicate that a significant long-term and short-term relationship exists between the interest rate volatility and the financing of Islamic banking industry providing significant evidence for co-movements and convergence. These findings suggest that paradoxical as it may seem, the financing of Islamic banks operating within a dual banking system is subject to interest rate risk, mainly due to benchmarking interest rate, which in-turn makes Islamic banks vulnerable to the rate of return risk and withdrawal risk. Moreover, corporate financing, in particular, is more vulnerable to interest rate risk.
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spelling pubmed-93214392022-07-27 Interest rate volatility and financing of Islamic banks Nouman, Muhammad Hashim, Maria Trifan, Vanina Adoriana Spinu, Adina Eleonora Siddiqi, Muhammad Fahad Khan, Farman Ullah PLoS One Research Article Despite a direct ban on charging interest, interest-based benchmarks are used as a pricing reference by a majority of Islamic banks, due in part to the absence of stable and widely- published alternatives. Benchmarking interest rate exposes Islamic banks to the problems of conventional banks, particularly the interest rate risk. Against this backdrop, the present study empirically examines the dynamic linkage between the interest rate volatility and the financing of Islamic banks. The empirical analysis is carried using evidence from the Islamic banking industry of Pakistan during the time period 2006–2020. The multivariate Johansen and Jusiles Co-integration test and Vector Error Correction Model (VECM) are used as the baseline econometric models. Moreover, the DCC-GARCH model is employed for robustness and ensuring the consistency of results. The results indicate that a significant long-term and short-term relationship exists between the interest rate volatility and the financing of Islamic banking industry providing significant evidence for co-movements and convergence. These findings suggest that paradoxical as it may seem, the financing of Islamic banks operating within a dual banking system is subject to interest rate risk, mainly due to benchmarking interest rate, which in-turn makes Islamic banks vulnerable to the rate of return risk and withdrawal risk. Moreover, corporate financing, in particular, is more vulnerable to interest rate risk. Public Library of Science 2022-07-26 /pmc/articles/PMC9321439/ /pubmed/35881655 http://dx.doi.org/10.1371/journal.pone.0268906 Text en © 2022 Nouman et al https://creativecommons.org/licenses/by/4.0/This is an open access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/) , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
spellingShingle Research Article
Nouman, Muhammad
Hashim, Maria
Trifan, Vanina Adoriana
Spinu, Adina Eleonora
Siddiqi, Muhammad Fahad
Khan, Farman Ullah
Interest rate volatility and financing of Islamic banks
title Interest rate volatility and financing of Islamic banks
title_full Interest rate volatility and financing of Islamic banks
title_fullStr Interest rate volatility and financing of Islamic banks
title_full_unstemmed Interest rate volatility and financing of Islamic banks
title_short Interest rate volatility and financing of Islamic banks
title_sort interest rate volatility and financing of islamic banks
topic Research Article
url https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9321439/
https://www.ncbi.nlm.nih.gov/pubmed/35881655
http://dx.doi.org/10.1371/journal.pone.0268906
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