Evaluation of the Islamic interbank benchmark rate

Abstract

PurposeThe purpose of this study is to evaluate the Islamic Interbank Benchmark Rate (IIBR) and investigate its relationship with conventional benchmark rates.Design/methodology/approachThis study relies extensively on multivariate regression and Granger causality analysis, using data culled for the IIBR, conventional interest-dependent benchmark rates and oil prices. The data was collected daily over a period spanning from November 2011 to June 2015.FindingsThe main finding of this study is that there is a significant negative correlation between the IIBR and London Interbank Offered Rate (LIBOR) and other conventional interbank benchmark rates. This negative linear relationship is due to the IIBR representing a substitute investment for international investors when traditional rates fall in relation to the IIBR.Practical implicationsThis study seeks to bring research on the IIBR and Sharia finance into the mainstream. It provides new insights into the IIBR as an independent interbank benchmark rate, exploring and confirming its status as a Sharia complaint financial tool.Originality/valueThis study is a comprehensive investigation of the relationship between the IIBR and conventional counterpart benchmark rates (LIBOR, Kuala Lumpur Interbank Offered Rate, effective federal funds rate and conventional rates in the Gulf Cooperation Council countries). The study contributes to the understanding of the IIBR’s framework principles and its value as a solution to current and future Sharia-complaint short-term interbank market funding for the Islamic finance industry.