Quantifying the Effect of Interest Rate on Islamic Banks Financing in the United Kingdom: Quantifying the Effect of Interest Rate on Islamic Banks Financing

Sulaimon Adebesin

doi:10.13135/2421-2172/8706

Authors

Sulaimon Adebesin University of Dundee

DOI:

https://doi.org/10.13135/2421-2172/8706

Keywords:

Islamic banks, Conventional banks, Interest rate, Islamic finance, United Kingdom

Abstract

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.

Author Biography

Sulaimon Adebesin, University of Dundee

Sulaimon Adebesin holds a bachelor’s degree in economics from Olabisi Onabanjo University and a master’s degree in economics from the University of Ibadan, both in Nigeria. He also has recently completed another master’s degree in Islamic Finance from the University of Dundee, United Kingdom. Before moving to the industry, the author had a brief stint in academia as a Graduate Assistant at the Department of Economics of Olabisi Onabanjo University, Ago-Iwoye. He is a non-resident research fellow at the Center for Econometrics and Allied Research (CEAR), Ibadan, Nigeria. His research interest is in Islamic banking, finance, and economic policies.

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Quantifying the Effect of Interest Rate on Islamic Banks Financing in the United Kingdom