Impact of Interest Rates on Islamic and Covenional Banks Essay

6569 Words May 16th, 2014 27 Pages
Munich Personal RePEc Archive

Impact of Interest Rates on Islamic and Conventional Banks: The Case of Turkey
Erge¸ Etem Hakan and Arslan Bengul Gulumser c ¨ ¨¨
January 2011

Online at MPRA Paper No. 29848, posted 4. April 2011 06:17 UTC

Impact of Interest Rates on Islamic and Conventional Banks: The Case of Turkey Etem Hakan Ergeça* and Bengül Gülümser Arslanb
Abstract Identifying the impact of the interest rates upon Islamic banks is key to understand the contribution of such institutions to the financial stability, designing monetary policies and devising a proper risk management applicable to these institutions. This article analyzes and investigates the impact of interest rate
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The interest-free funds have significantly increased from only 150 billion dollars in the 1990s to over 1 trillion dollars by the end of 2008. This refers to a 23% annual growth; analysts also estimate that the amount of these funds will reach to 1.5 trillion dollars by 2013 (Participation Banks, 2009, p. 29). It should be noted that these financial instruments are popular not only in predominantly Muslim countries but also in non-Muslim nations (i.e., HSBC, Standard Chartered Bank, Deutsche Bank, Citibank, etc.). A growing number of a Department of Economics, Eskisehir Osmangazi University, Turkey Corresponding author. E-mail: b Department of Economics, Anadolu University, Turkey 1 In this article, Islamic bank refers to “interest-free deposit bank” and conventional bank to “interestbased deposit bank.”


banking institutions in these countries now offer interest-free banking services to their customers including non-Muslims who have a keen interest PLS financial instruments (Awan, 2009, p. 1).

The first Islamic banks in Turkey were introduced under the name of Special Finance Houses (SFH) in 1985 upon completion of the legal foundation during the period between 1983 and 1985. Under new regulations adopted in 2005, the titles of these institutions were converted to participation bank and they were further subjected to the same regulations as conventional banks in 2006. While the number of these interest-free

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