This study investigates the behavioral aspects of Islamic bank depositors in a dual banking system. By categorizing depositors into groups based on the amount of their deposited funds, we estimate the responses of these groups to interest rate changes. We take the findings of conventional banks as a comparative baseline and investigate the extent to which the changes in different Islamic depositor groups differ from conventional depositor groups. The findings show that depositors in both Islamic and conventional banks respond to interest rate changes. The analysis indicates that Islamic bank depositors are more responsive when their deposit sizes are larger. When Islamic bank depositors' opportunity costs rise due to a rise in the interest rate, they do not hesitate to withdraw deposits. The relation between interest rate changes and deposits is more robust in Islamic banks than in conventional banks.
Sovereign credit ratings are widely used measurements for "country risk" in international capital markets. However, they have been exposed to increasing criticism in the aftermath of the recent global financial crises. Many international authorities proposed new frameworks for the regulation and supervision of the credit rating sector, in which many countries have taken various steps in this respect. Yet the reliability of sovereign credit ratings has not been criticized in the literature. Using random effects ordered probit modeling, this study explores the reliability of credit ratings. Separate analyses of developed and developing countries suggest that the consistency of credit ratings differs by favoring the developed country group.
Although it has been intensively claimed that Islamic banks are more subject to market discipline, the empirical literature is surprisingly mute on this topic. To fill this gap and to verify the conjecture that Islamic bank depositors are indeed able to monitor and discipline their banks, we use Turkey as a test setting. The theory of market discipline predicts that when excessive risk taking occurs, depositors will ask higher returns on their deposits or withdraw their funds. We look at the effect of the deposit insurance reform in which the dual deposit insurance was revised and all banks were put under the same deposit insurance company in December 2005. This gives us a natural experiment in which the effect of the reform can be compared for the treatment group (i.e., Islamic banks) and control group (i.e., conventional banks). We find that the deposit insurance reform has increased market discipline in the Turkish Islamic banking sector. This reform may have upset the sensitivities of the religiously inspired depositors, and perhaps more importantly it might have terminated the existing mutual supervision and support among Islamic banks.JEL codes: G23, G28, O52
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