Lowly or Negative Benchmark Rates Bandwagon: Any Risk Implications for Islamic banks?

The legacy of global financial crisis is continuing to present extraordinary challenges to the global economy, in general and the banking industry, in particular. This has brought the financial industry to a new phenomenon termed ‘a new normal’. In order to stimulate economy, regulators across all jurisdictions have been taking unconventional approaches, which have proven to be effective to a certain extent but have also echoed further concerns regarding their sustainability. The global banking industry is witnessing historic low rates regime and a variety of economic factors have pressed these rates further, challenging price and economic stability. Thus, in recent years, the management of benchmark rates (or interest rates) have received considerable prominence in the banking sector due to a number of reasons including supervision banks’ benchmark rates under Basel II. A lot has been published previously on this subject, however, very little has been explored from the Islamic bank’s perspective. Taking into account the specific features of Islamic banks, this article reviews the possible dysfunctional implications of lowly and/or negative rates, and provides a risk management and regulatory perspective for Islamic banks. These implications call for a better risk management with appropriate tools and effective supervisory oversight. It is hoped that the initial discussion presented in this paper on the implications and controls invites a broader debate on this issue in the Islamic financial services industry.