Interbank offered rates in Islamic countries: Is the Islamic benchmark different from the conventional benchmarks?

Abstract

Motivated by the size and the growth of the global Islamic financial services industry, 17 Islamic Banks in six Islamic countries, in conjunction with Thompson Reuters, developed an Islamic Interbank Benchmark Rate (IIBR, hereafter) to address the Sharia compliance requirements of Islamic banks in the money market. This paper examines to what extent this newly introduced monetary tool differs from the conventional interbank rates used in the countries of contributing banks to the IIBR. We use cointegration analysis, Granger causality tests and Vector Autoregressive Models to investigate the dynamics and the inter-temporal linkages between the Islamic and conventional interbank benchmarks in five countries from Gulf Cooperation Council (GCC, hereafter) region. Results show that the IIBR exhibits a long-run relationship with the conventional rates and fails to be independently determined. Our findings advocate also that market conditions such as oil prices and inflation do not contribute to the dynamics between the IIBR and the conventional interest-based interbank benchmarks.