Relationship between Rate of Returns on Foreign Exchange Islamic and Conventional Deposits in Turkey

Abstract

The causal relationship between the rates of return on deposits of Islamic banks and deposits of conventional banks in an economy with dual banking systems is a significant area of study in the literature. While studying this causal relationship, vast majority of the existing studies consider domestic currency deposits. In this paper instead of domestic currency deposits, I consider foreign exchange currency deposits. By employing Toda-Yamamoto causality analysis, a causality relationship for all the maturity groups is found, but not for the 12-months maturity. For dollar accounts, the causality relationship between rate of returns of Islamic and Conventional banking is found to be two-way. For Euro accounts, this causality relationship is found to be one way, where the interest rate of conventional banks is Granger cause of profit share of Islamic banks.