Interest Rate and Financing of Islamic Banks in Indonesia (A Vector Auto Regression Approach)

Abstract

Not only do commercial banks but also Islamic banks take part towards the economic growth and stability in Indonesia. Islamic banks through the financing services provide sources of fund for investment activities. However, Islamic banks do not employ variable of interest rate in financing activities because it is prohibited in Islam. The banks utilize a profit sharing rate (PSR) system instead. Moreover, the banks must avoid themselves from the influence of interest rate directly or indirectly. This paper aims at exploring the existence of interest rate towards the financing of the Indonesian Islamic banks. By using the VAR method and monthly-based time series data from 2009-2015, interest rate represented by commercial banking rates for consumption (CBRc) and for working capital (CBRwc), the research result indicates that the Islamic banks’ financing in Indonesia is indirectly influenced by interest rate. Both the Granger causality and the Pearson correlation tests show that the financing correlate significantly with the rate. The correlation between them is also proved by Impulse Response Function (IRF).