Quantifying the Effect of Interest Rate on Islamic Banks Financing in the United Kingdom
The conceptual framework of Islamic banking and finance is predicated on prohibiting riba (interest) and avoiding business practices that contravene ethical norms, potentially leading to injustice. Notwithstanding its professed commitment to eschew interest-based transactions, there is a prevalent...
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| Format: | Article |
| Language: | English |
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Università degli Studi di Torino
2024-12-01
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| Series: | European Journal of Islamic Finance |
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| Online Access: | https://ojs.unito.it/index.php/EJIF/article/view/8706 |
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| Summary: | The conceptual framework of Islamic banking and finance is predicated on prohibiting riba (interest) and avoiding business practices that contravene ethical norms, potentially leading to injustice. Notwithstanding its professed commitment to eschew interest-based transactions, there is a prevalent concern among scholars and researchers that Islamic banking remains susceptible to the vicissitudes of interest rate fluctuations. This research examines the nexus between interest rates and Islamic bank financing within the United Kingdom, which is recognised as a pivotal centre for Islamic Finance in Europe. Employing a panel dataset that includes 60 observations spanning from 2008 to 2021, derived from the annual reports of the four full-fledged Islamic banks in the UK, and utilising the Random Effect model, our analysis discloses a negative, albeit statistically insignificant, correlation between the financing activities of Islamic banks and interest rates in the UK. Furthermore, the study elucidates that interest rates adversely impact deposit accumulation in Islamic banks, consequently hindering their capacity to extend credit to their clientele. As a result, it becomes imperative for Islamic banks to diminish their dependency on conventional interest rates to maintain the trust of stakeholders, who are motivated by the intention to avoid interest-based transactions in all their manifestations. This study contributes to the enrichment of the extant literature by convincingly demonstrating that the influence of interest rates on Islamic banking financing in the UK aligns with the findings from other jurisdictions reported in similar research endeavours.
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| ISSN: | 2421-2172 |