Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework

Aysan, Ahmet Faruk; Disli, Mustafa; Duygun, Meryem; Öztürk, Hüseyin

doi:10.1007/s10693-016-0248-z

Cited by 47 publications

(37 citation statements)

References 51 publications

(44 reference statements)

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“…The underlying reason for this is that no return should be served without proper risk-taking: Islamic banks can transfer investment losses to its profitsharing investment account holders, which are viewed as partners in these investments. Aysan et al (2015Aysan et al ( , 2017 argue that this feature makes Islamic banks especially susceptible to market discipline, and will therefore be more penalized by their depositors if they show more risky behavior. Furthermore, because of the scarcity of non-interest bearing instruments, Islamic banks are also more heavily reliant on deposit-funding, which leaves more room for market discipline.…”

Section: Background and Rationalementioning

confidence: 99%

Small business lending and credit risk: Granger causality evidence

Aysan

Disli

2019

Economic Modelling

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Because of their opaque nature, SMEs are overly reliant on bank lending. Therefore, we examine whether banks' credit supply to SMEs are affected by their financial conditions. To this end, we employ a Granger causality analysis to examine whether there is an indication of a significant direction of determination between SME lending and non-performing SME loans. The results reveal no bidirectional relationship between SME lending and NPL for the entire banking sector. For Islamic banks, however, we find two-way linkages between these two parameters: a negative causation is running both from SME lending to NPL growth and from NPL to SME lending. Given Islamic banks' deposit-oriented funding practices and their adherence to profit-and-loss sharing principles, this finding suggests the presence of heightened market discipline within the Islamic banking system.

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Section: Background and Rationalementioning

confidence: 99%

Small business lending and credit risk: Granger causality evidence

Aysan

Disli

2019

Economic Modelling

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“…A priori proposition would suggest that Islamic banks and their depositors are insensitive to policy rate changes since the main pillar of Islamic banking is the prohibition of riba (interest). Islamic banks operate like equity‐based companies where depositors are treated as quasi‐shareholders (Aysan, Disli, Duygun, & Ozturk, ; Khan & Mirakhor, ). In this business model, banks share their earnings with their depositors according to a pre‐agreed rate of return.…”

Section: Brief Literature Survey and Motivationmentioning

confidence: 99%

Bank lending channel in a dual banking system: Why are Islamic banks so responsive?

2017

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We examine the interest rate sensitivity of both deposits and credits at Islamic and conventional banks in Turkey. We find that the bank lending channel is especially operative for Islamic banks. Impulse responses for conventional and Islamic banks reveal that Islamic bank depositors’ sensitivity to policy rate changes is substantially larger than that of conventional bank depositors. Next to heavily dependence on deposit funding, we consider that inertia in Islamic bank deposit rates impedes these banks to keep those depositors who consider the opportunity cost of monetary policy rates is unbearable. On the lending side, we obtain similar results, implying that tight monetary policy leads to a larger contraction in Islamic bank credits. This finding is a reflection of the favourable attitude of Islamic banks towards small and medium‐sized enterprise (SME) financing. When similar relationships are analysed for currency and inflation shocks, we again find larger responses for Islamic banks showing the cyclical nature of SME credits.

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“…Recently, research on banking stability and its determinants has focused on two areas: bank competition and government intervention (Abedifar, Molyneux, & Tarazi, 2013;Ariss, 2010;Aysan, Disli, Duygun, & Ozturk, 2017;Beck, 2008;González, Razia, Búa, & Sestayo, 2017;Mili & Abid, 2017). The impact of competition on stability is controversial.…”

Section: Introductionmentioning

confidence: 99%

Bank competition, stability, and intervention quality

et al. 2018

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We use a flexible semi‐parametric estimation approach and a sample of 7,227 U.S., U.K., and Canadian banks for 2009–2015 to provide evidence that banking stability is non‐linearly determined by competition. We show that stability is not monotonic against competition, and may increase and decrease at high competition, has a mixed behaviour at medium competition, and increases at low competition. This non‐monotonic stability behaviour at different competition levels is attributed to the intervention quality, which is found to be an important determinant of the competition–stability relation. It is non‐linearly related to and being revised at different competition levels. As intervention is a policy variable, its level can be adjusted to reduce the competition effects on stability. We illustrate that for the U.S. banking sector, the intervention quality has to hedge these competition effects. Regulators should treat intervention quality as a “hedging instrument” against the destabilizing competition effects.

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Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework

Cited by 47 publications

References 51 publications

Small business lending and credit risk: Granger causality evidence

Small business lending and credit risk: Granger causality evidence

Bank lending channel in a dual banking system: Why are Islamic banks so responsive?

Bank competition, stability, and intervention quality

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