International Journal of Nonlinear Analysis and Applications

The financial impact of deposit interest rates in Iranian Islamic banks: A dependency on the conventional banking system

Document Type : Research Paper

Authors

Department of Economics, South Tehran Branch, Islamic Azad University, Tehran, Iran

Abstract

The foundation of Islamic banking lies in profit-sharing, the specification of resource utilization paths, and the supervision of banking operations. Unlike conventional banking, in Islamic banking, depositors' funds are invested according to Sharia-compliant legal frameworks and specific contractual agreements. This study evaluates and compares the financial performance and dependency of deposit interest rates between Islamic banks in Iran and the conventional banking system. Considering the ex-post nature of the research topic, past data (spanning from March 21, 2009, to July 21, 2024) were analyzed using the nonlinear autoregressive distributed lag (NARDL) approach. All analyses were conducted using EViews software version 13. The results indicate that the overnight policy rate, linked to the central bank’s interest rate, serves as a statistically significant determinant, both positively and negatively, for the Islamic money market rate in the short and long term. Furthermore, this study examines maturity-aligned rates and evaluates the significant positive and negative impacts of fixed deposit rates in conventional banks on investment rates in Islamic banks over both short and long horizons. The Islamic money market rate, used as a proxy for monetary policy rates, has a statistically significant positive and negative influence on Islamic bank deposit rates in the short and long term.

Keywords

[1] S. Aziznejad, Challenges and practical solutions for determining bank interest rate in Iranian economy, Majlis Rahbord 19 (2012), no. 71, 181–200. [In Persian]
[2] A. Bagheri and R. Dabbagh, The impact of banking factors on the financial performance of Islamic and conventional banking in selected Muslim countries, Second Nat. Conf. Mod. Res. Manag. Law, Kazeroon, 2018. [In Persian]
[3] R. Bashardoost, M. Derakhshandeh, and N. Merivani, Examining the status of banking fees from economic, legal, and jurisprudential perspectives, Fifth Int. Conf. Relig. Res. Islamic Sci. Jurisprud. Law in Iran and the Islamic World, Tehran, 2021.
[4] B.S. Bernanke and A.S. Blinder, Credit, money, and aggregate demand, Amer. Econ. Rev. 78 (1988), no. 2, 435–439.
[5] M.K. Dimasi and S.J. Hashemi, Comparative analysis of usury and bank deposit profits, Fourth Nat. Conf. Efficien. Eval. Law Islamic Republic of Iran, Meybod, 2017. [In Persian]
[6] H. Eyvazlou and M. Baky Haskouee, The mechanism of profit rate formation in Iranian banking system, Econ. Stud. Polic. J. 7 (2020), no. 2, 165–186. [In Persian]
[7] M. Hashemkhani, Examining risks in Islamic banking and their relationship with corporate governance in banks, Third Int. Conf. Modern Dev. Manag. Econ. Account., Tehran, 2019. [In Persian]
[8] M. Jarireh and S. Gheibipour, The impact of banking financial ratios on changes in deposit interest rates with emphasis on the intermediating role of credit allocation (lending): A case study of banks listed on the Tehran Stock Exchange, Seventh Int. Conf. Manag. Account. Econ. Dev., 2021. [In Persian]
[9] A.K. Kashyap and J.C. Stein, What do a million observations on banks say about the transmission of monetary policy?, Amer. Econ. Rev. 90 (2000), no. 3, 407–428.
[10] M. Khosravi and K. Nadri, A critique of the bank interest theory in Islamic banking studies, focusing on the impact of money creation on interest rate determination, Islamic Econ. Stud. Bi-quart. J. 12 (2020), no. 2, 1–34. [In Persian]
[11] C. Meslier, T. Risfandy, and A. Tarazi, Dual market competition and deposit rate setting in Islamic and conventional banks, Econ. Modell. 63 (2017), 318–333.
[12] S.R. Mirebrahimi, B. Akbari Moghaddam, S.F. Fakhrehosseini, and A. Mirzapour Babajan, Examining the reaction of inflation to contractionary monetary policy in Iran’s Islamic banking system based on a stochastic dynamic general equilibrium model, J. Econ. Essays: Islamic Approach 16 (2019), no. 31, 111–136. [In Persian]
[13] M.H. Pesaran, Y. Shin, and R.J. Smith, Testing for the `Existence of a Long-run Relationship’, Faculty of Economics, University of Cambridge, 1996.
[14] M. Ramezani, The role of Islamic banking in economic growth during the year of production leap, Eighth Nat. Conf. Manag. Human. Res. Iran, Tehran, 2020. [In Persian]
[15] A.U. Rehman, E. Aslam, and A. Iqbal, Intellectual capital efficiency and bank performance: Evidence from Islamic banks, Borsa Istanbul Rev. 22 (2022), no. 1, 113–121.
[16] S.M. Saeed, I. Abdeljawad, M. Kabir Hassan, and M. Rashid, Dependency of Islamic bank rates on conventional rates in a dual banking system: A trade-off between religious and economic fundamentals, Int. Rev. Econ. Finance 86 (2023), 1003–1021.
[17] M. Seho, O. Ismath Bacha and E. Smolo, The effects of interest rate on Islamic bank financing instruments: Cross-country evidence from dual-banking systems, Pacific-Basin Finance J. 62 (2020), 101292.
[18] K. Sohaili, Theoretical comparison of usury forbidden and usury-free banking efficiency in mobilization and allocation of resources, Islamic Econ. Stud. Bi-quart. J. 1 (2008), no. 1, 113–138. [In Persian]
[19] M. Talebi, Introduction to an alternative paradigm for the induced paradigm in Islamic banking, Islamic Financ. Res. 8 (2018), no. 1, 91–116. [In Persian]
[20] M. Zamani Nasab, F. Khosravi and S.S. Miri, Islamic banking and its impact on economic growth, Eleventh Int. Conf. Modern Manag. Account. Econ. Bank. Strateg. Focus. Bus. Growth, 2021. [In Persian]
International Journal of Nonlinear Analysis and Applications
Volume 17, Issue 5
May 2026
Pages 141-153
  • Receive Date: 30 November 2024
  • Accept Date: 31 January 2025