Interest rate volatility and the performance of islamic banks
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Date
2015
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Publisher
UNIVERSITY OF MANAGEMENT AND TECHNOLOGY
Abstract
Market interest rates in an economy keep on changing. The objective of this research study was to analyze the impact of interest rate changes on the performance of Islamic Banks. For this purpose, four independent variables named, Discount Rate (DR), Karachi Interbank Offer Rate (KIBOR), Treasury bill (T.bill) rate, and PakistanInvestment Bond (PIB) rate were taken as a proxy for interest rates while the performance of Islamic Banks was measured using Return of Asset (ROA) and Return on Equity (ROE) ratios. Secondary data was used for this research study which was obtained from the State Bank of Pakistan's official website. Vector Auto Regression (VAR) model, Impulse Response Function (IRF) and Variance Decomposition Analysis (VDA) was used to see the impact of interest rate changes on the performance of Islamic Banks. The findings showed that there was not a significant impact of interest rate changes on the performance of Islamic Banks. The study also concluded that although Islamic Banks use KIBOR as benchmark rate, Islamic banks still able to effectively mitigating interest rate risks by using various interest mitigating techniques. The research also recommended that Islamic Banks, instead of using KIBOR as benchmark should adopt a business model which do not take into consideration the market interest rates and carry out their operation keeping in view the true principles of Islam. A complete new business model for Islamic Banks is proposed in this regard.
Description
Supervisor: Muhammad Mahmood Shah Khan
Keywords
MS Thesis, Interest Rate, Performance of Islamic Banks, Volatility