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Volume 14
Issue 4
Online publication date 2018-08-25
Title Is there any causality between Islamic banks’ return on depositors and conventional banks’ deposit interest: Evidence of causality from Bahrain’s financial market
Author Abdus Samad
Unlike conventional banks' interest payment on deposits, Islamic banks do not pay interest to depositors. What they pay to depositors is called the rate of return to depositors. Does the rate of return of Islamic banks on deposits follow conventional banks' interest rates? This paper empirically investigates the relationship of causality and the causal direction between conventional banks' interest rate and Islamic banks' return applying VEC model. The results of the VAR Granger Causality/Block Exogeneity Wald Tests fail to reject the null hypothesis of bidirectional causality between Islamic banks' rate of return and conventional banks' interest. The pairwise Granger causality also confirms the same results. This suggests that Islamic banks' rate of return and the conventional banks' interest rate are not independent of each other rather they follow each other in the Bahrain financial market.
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Keywords Bahrain, conventional bank, interest rate, Islamic bank, rate of return, Granger causality
Pages 894-912
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