The dependency of Islamic bank rates on conventional bank interest rates: further evidence from Turkey

The nexus between Islamic banks’ returns on term deposits (participation accounts) and conventional banks’ (CBs) interest rates on term deposits is one of the controversies with regard to Islamic finance. The obvious correlation between two sides is considered a convergence of Islamic banking to the conventional mode and the breach of the ‘risk sharing’, the underlying principle of Islamic finance. The aim of this study is to econometrically investigate the long-term relationship between CBs’ term-deposit rates (TDRs) and participation banks’ (PBs) TDR in Turkey. We undertake an elaborate analysis of the dependency of each PBs in Turkey on interest rates utilizing the most recent econometric techniques including Maki cointegration tests with multiple breaks and frequency domain causality tests. Findings show that TDRs of three PBs are significantly cointegrated with those of CBs, while one is not. In addition, permanent causality is found from CBs to all PBs.