The Effect of Conventional Bank’s Interest Rate & Islamic Bank’s Profit Rate on Investment & Return: An Empirical Investigation in Bangladesh

Since depositors are motivated by returns, it is importantfor Islamic banks management to understand the extent thatrates of return on deposits influence their customers’ decisionto deposit. The main objective of the study is to explorethe degree of influence of conventional bank’s interest rate onIslamic bank’s profitability and vice-versa. It has been seenfrom 2005 to 2011 that the rate of interest declared on depositby conventional banks has a negative impact on profitabilityof both types of banks in Bangladesh. Rate of profit declaredon deposit by Islamic banks is positively related with theirprofit earned but negatively related with profit earned byconventional banks. We see that rate of interest declared ondeposit by Conventional Banks is positively related with theirdeposit volume but negatively related with Islamic Bank’sdeposit. On the other hand, rate of profit declared on depositby Islamic Banks is negatively related with deposit levels ofboth types of banks. The survey result shows that almost 85%of the respondents are choosing Islamic banks only from theirreligious point of view and more than 60% of the sampledIslamic bank customers are reluctant to leave the bank evenif conventional banks offer better interest rates.