The causality between returns of interest-based banks and Islamic banks: the case of Turkey

Purpose – This study aims to test whether the Islamic bank rate of returns are affected by the deposit rates of the interest-based bank in Turkey and whether they need to develop additional tools to manage it if they face an interest risk. Design/methodology/approach –This study tests the causality between the Islamic bank rate of returns and the time deposit interest rates between 2002 and 2010 in Turkey by use of the Granger Causality method based on monthly data. The same analysis is repeated with respect to the terms before and after 2006. Findings – It is concluded that for each term, the time deposit interest rates are the Granger cause of the Islamic bank rate of returns. This causality relation is more visible for the period after 2006. Originality/value –The results shows that the Islamic banks are sensitive to the interest-based bank interest rates in Turkey. Therefore, this finding suggests that these banks need to remain cautious vis-à-vis the interest rate risk.