EFFECTS OF INTEREST RATE (RIBĀ) ON ISLAMIC BANKS & ECONOMY

Abstract

The structure of almost all economies today is based on interest rates, which is the essential determinant of savings and investment according to classical, neoclassical, and contemporary economists. Therefore, the purpose of this paper is to examine the effect of interest rates on savings and investment, and its influence on the performance of Islamic banks. The study adopts library research and conceptual approach as the method of analysis. Furthermore, the authors have reviewed a significant body of relevant studies written on various aspects of profit and interest, to assess the effects of interest rates on Islamic banks and economy. The results imply that Islamic banks are exposed to interest rate risks while conventional banks are not affected by this, which negatively affects their performance. Meanwhile, the results reveal that there is a negative impact of interest rates on savings and investment which, to some extent, brings economic destabilization. The results of this study may have some substantial implications for economic growth in Muslim and non-Muslim countries. It also provides a platform which facilitates the understanding of saving and investment from the Islamic perspective, and solutions for the existing obstacles in Islamic economics.