INTEREST RATE RISK IN INTEREST-FREE BANKS: AN EMPIRICAL RESEARCH ON TURKISH PARTICIPATION BANKS

Year 2018, Volume: 5 Issue: 1, 89 - 108, 15.02.2018

İlker Koç

Abstract

Participation banks,
which are globally called as Islamic Banks or interest-free banks, basically
receive fund based on profit-loss sharing principle and make loan via  purchasing a
commodity or a service and selling it to customers for a higher price (murabaha
method) or profit-loss sharing investment contracts (mudarabah or musharakah
method). In literature, most of theoretical studies suggest that interest-free
banks’ business model is based on profit-lost sharing principles and therefore
unlike conventional banks these institutions are not exposed to interest rate
risk. Conversely some empirical studies suggest that Islamic banks’
profitability is affected by market interest rates and these institutions are
exposed to interest rate risk. In this study, with reference to Basel
Committee’s definition of interest rate risk, effects of market interest rate fluctuation
to the profitability of Turkish Participation Banks has been analyzed
with Seemingly Unrelated Regression method for the period between June 2005-
June 2016.  It is found that there is a
significant relationship between the profitability of the participation banks
and interest rate changes and therefore each institution is exposed to the
interest rate risk in different levels. 

Keywords

Islamic Banking, Interest-Free Finance, Interest Rate Risk, Seemingly Unrelated Regression

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