Abstract
M.Com. (Development Economics)
Since the first Egyptian experiment in 1963, Islamic banking has grown rapidly. The establishment of
the Islamic Development Bank and the Dubai Islamic Bank in 1975 were watershed moments in
modern Islamic economics. Its growth has been recorded at an average of 10-15% per year and the
industry is worth over $1 trillion. Growth in the Middle Eastern countries has resulted in
unprecedented growth which has further resulted in the introduction of Islamic banking products in
conventional banks. This growth has equally been seen in the South African banking market with the
establishment of Islamic banking products through most conventional banks.
This paper aims to establish if there is a mismatch between the ideal of Islamic banking and the
practical application of it. To answer this question this paper seeks to establish a link between the
rate of interest and the rate of profit and establish if there exists a long-term relationship between
the South African interest rate and the rates of return offered on Islamic banking instruments. An
empirical analysis which includes a cointegration test followed by an error correction model seeks to
prove this hypothesis.
Results from the empirical analysis were consistent with the economic theory of the link between
the rate of interest and the rate of profit. It was noted that within the South African model, the
Islamic Sukuk has a long-term relationship with the STeFI which is used as a proxy for the South
African interest rate. The subsequent error correction model shows that Islamic Sukuk lags the STeFI
by one period and corrects for disequilibrium in the following period; this further compounds the
economic theory on offer in that the Sukuk is always behind the STeFI and always needs to adjust to
it.