Are Pakistani Islamic Banks Really Interest-free?

Abstract

The performance of Islamic banks is considered as a realistic evolution from the study of history. Islamic banking is actually the system of banking that is purely based on Islamic jurisprudence. It has become an undeniable reality, and it is evident from the increasing number of Islamic banks. The discriminatory features of Islamic banking are the prohibition of riba (interest) and Profit and Loss Sharing (PLS) according to Shariah principles. The current study investigates the impact of conventional banks’ deposit rates on investment rates of Islamic banks in Pakistan. Also, the study attempts to resolve the puzzle that Islamic banking is interest-free or interest-based by using the data from Islamic and conventional banks in Pakistan from 2010 to 2016. From the analysis, it is found that the concept of Islamic banking is not much different from that of conventional banking in Pakistan. Besides, investment rates of Islamic banks are caused by deposit rates of conventional banks, but not vice versa. Furthermore, the results showed that the Islamic rates do not have any impact on conventional banks’ deposit rates. But in case of non-Islamic banks, deposit rates have a significant impact on Islamic rates which shows that different economic policies and religious factors also affect the fluctuation in investment rates.