Interest Rate Risk in Islamic Banking
Interest Rate Risk in Islamic Banking
Introduction
Many countries, especially those with a substantial number of Muslim citizens operate a dual banking system. This system has both the Islamic and conventional banking systems which cater for the needs of both the Muslim bankers and the non-Muslim bankers. In a conventional and theoretical banking system, it would be expected that a change in the banking interest rates would yield a responsorial change for customers in the event that the customers are guided and motivated in their banking by the need to make profits. This is however not the case as Islamic bankers act rationally and not according to the profit motive. This way, there are no evident shifts in the deposits made because
Islamic customers are indifferent to the changes in demand and they are not influenced by the profit motive. Islamic deposits have moved closer to the interest rates of the conventional banking deposits thus making the two systems relatively similar. The purpose of this study is to determine the interest rate risks involved in the Islamic system of banking. This is derived from the fact that because customers are motivated by the need to make profits in the banking process, the Islamic banks that operate in the dual system of baking are exposed to the interest rates risk despite the fact that they operate on the principles of an interest-free banking system.
Discussion
Interest rate risk is defined as the amount of risk that an investments’ value is likely to change by as a result of a change in the total value of the interest rates in the country and according to the particular season. Such changes are likely to affect the securities market and an investor can limit and reduce this risk by diversifying the amount and number of investments he makes so that he is able to spread the risk across the investments. There is a significant difference between Islamic banking as compared to the conventional system of
Introduction
Many countries, especially those with a substantial number of Muslim citizens operate a dual banking system. This system has both the Islamic and conventional banking systems which cater for the needs of both the Muslim bankers and the non-Muslim bankers. In a conventional and theoretical banking system, it would be expected that a change in the banking interest rates would yield a responsorial change for customers in the event that the customers are guided and motivated in their banking by the need to make profits. This is however not the case as Islamic bankers act rationally and not according to the profit motive. This way, there are no evident shifts in the deposits made because
Islamic customers are indifferent to the changes in demand and they are not influenced by the profit motive. Islamic deposits have moved closer to the interest rates of the conventional banking deposits thus making the two systems relatively similar. The purpose of this study is to determine the interest rate risks involved in the Islamic system of banking. This is derived from the fact that because customers are motivated by the need to make profits in the banking process, the Islamic banks that operate in the dual system of baking are exposed to the interest rates risk despite the fact that they operate on the principles of an interest-free banking system.
Discussion
Interest rate risk is defined as the amount of risk that an investments’ value is likely to change by as a result of a change in the total value of the interest rates in the country and according to the particular season. Such changes are likely to affect the securities market and an investor can limit and reduce this risk by diversifying the amount and number of investments he makes so that he is able to spread the risk across the investments. There is a significant difference between Islamic banking as compared to the conventional system of
References: Iqbar Zamir. Islamic Financial Systems. 1997. Web. Interdisciplinary Journal of Research in Business, 1(1): 35-44. 2011. Web. PWC. Growing Pain: Managing Islamic Banking Risks. 2012. Web.