Is there a Link between Profit Share Rate of Participation Banks and Interest Rate?: The Case of Turkey

Today, the sensitive side of national economies is financial sector. The main reason for this sensitivity is financial crises. This situation has increased the demand and orientation for Islamic finance as a substitute for the modern financial system. The Islamic finance is discussed as a real solution to financial crises because the Islamic finance methods and applications depend on real economic activities. Both this case and the distance that is taken by Muslim countries in recent years has increased the share of Islamic banking/finance in the world. Thus, it has been a long debate in Islamic finance literature to investigate the presence of dependency between profit share rate settled by participation banks and deposit interest rate offered in conventional banking. In this study, variables that affect profit share rate of participation banks and deposit interest rate of conventional banks are examined over the period between January 2006 and May 2015 in Turkey. Multiple regression analysis is made by OLS method and Granger Causality is applied. Empirical results are pointed out that interest rate on government security and foreign exchange rate are significantly effective on participation banks’ profit share rate. In addition, the profitability of conventional banks, government security, and foreign exchange rate are significantly effective on deposit interest rate settled by conventional banks. Besides, Granger causality analysis stressed that there is bidirectional causal relationship between profit share rate and interest rate. The main reason for this link between conventional interest rate and profit share rate arises with the domiance of murabahah, simple buy and sell with term sale transactions, at Islamic financial institutions. The interest rate is a benchmark for participation banks to determine the profit share rate. To get rid of this dependency, Islamic financial institutions may tend towards mudarabah transactions.