Stochastic Behavior Of Overnight Conventional And Islamic Interbank Rates

by Asrul Sani B. Baharuddin

Abstract

The interbank rates are very important in economic development and in the banking system. The parallel operation of conventional and Islamic interbank rates in Malaysia provides ample opportunities to the banks to divert borrow and lend in money market. These short term rates decide the operation of the entire financial system. An efficient financial system is an important aspect of economic development. The behaviour of interbank rates is important in deciding economic cycles and the whole financial system. Banking, insurance, capital market, bond market, all depends on this interbank rate. Hence a study was conducted taking both conventional and Islamic interbank rates. MATLAB software was use to picture the movement of the interbank rates. The result reveals neither rates are stable. Some periods the conventional rates are stable while Islamic rates are volatile and vice versa. A further probe will reveal the factors which cause these volatilities, which are very imp&tant for forecasting, budgeting and control. This will help in regulating the economic and result in smooth functioning of both conventional and Islamic financial systems.

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