Comparative study of the Islamic interbank benchmark verses conversional rates

Abstract

Purpose

The purpose of this study is to evaluate the Islamic Interbank Benchmark Rate (IIBR) and investigate its relationship to conventional benchmark rates.

Design/methodology/approach

The methodology in this study relies extensively on multivariate regression and Granger Causality analysis, using data culled for IIBR, conventional interest-dependent benchmark rates and oil prices which were collected daily over a period spanning from November 2011 to June 2015.

Findings

The main finding of this study is that there is significant negative correlation between the IIBR and London Interbank Offered Rate (LIBOR) and other conventional interbank benchmark rates. This negative linear relationship is due to the IIBR representing a substitute investment for international investors when traditional rates fall in relation to the IIBR.

Practical implications

This study seeks to bring research on IIBR and Sharia finance into the mainstream. It provides new insights into the IIBR as an independent interbank benchmark rate, exploring and confirming its status as a Sharia complaint financial tool.

Originality/value

This study is a comprehensive investigation of the relationship between the IIBR and conventional counterpart benchmark rates (LIBOR, Kuala Lumpur Interbank Offered Rate [KLIBOR], Effective Federal Funds Rate [EFFR] and conventional rates in GCC countries). The study contributes to the understanding of the IIBR’s framework principles and its value as a solution to current and future Sharia-complaint short-term interbank market funding for the Islamic finance industry.

Citation

Tlemsani, I. (2020), "Comparative study of the Islamic interbank benchmark verses conversional rates", Journal of Islamic Marketing, Vol. 11 No. 6, pp. 1351-1365. https://doi.org/10.1108/JIMA-03-2019-0053