Role of the Kibor Rate in conventional and Islamic Banks of Pakistan

Abstract

The present study is aimed to study the interest rate impact in the overall banking system of Pakistan, including both the Islamic and conventional banks. In this article both the short and long term impact of interest rate (KIBOR) on total deposits and profitability of the conventional and Islamic banks is studied. The study also focuses on studying the long and short run impact of the interest rate on total deposits as well as the profitability of both banking systems under study. The data is being analysed using the Panel Autoregressive Distributive lag test, and it spans the years December 2010 through December 2019. The study's conclusions demonstrate that, over time, KIBOR has a favourable and considerable impact on conventional banks' total deposits. Whereas, in the short run the impact of interest rate is also positive but is insignificant. From the statistical analysis of the collected data it is evident that KIBOR affects the return on assets (ROA) significantly and positively in long term maturity of conventional banks while the effect in the short term is positive but the results are not significant. While the interest rate shows a negative effect on the total deposits of the Islamic banks both in short and long term. However, the effect of interest rate on the return on assets (ROA) of Islamic banks has a positive relation of the Islamic banks in the long run and vice versa in the short term.

Keywords:  KIBOR (interest rate), ROA profitability, Islamic banks, conventional bank, T Deposits