Financial Development and Economic Performance Nexus in the

advertisement
Financial Development and Economic Performance Nexus in the Case of Islamic and
Conventional Banks in Turkey: An Empirical Analysis
Mehmet Asutay
Reader in Middle Eastern and Islamic Political Economy and Finance
Director, Durham Doctoral Training Centre in Islamic Finance
Email: mehmet.asutay@durham.ac.uk
Etem H. Ergec
Faculty of Economics and Business Administration
Eskisehir Osmangazi University
Email: ehergec@gmail.com
Abstract:
Islamic banking and finance is now considered as part of the global financial system by taking
up important role in economic growth in many countries in which it operates. 1983 marked
the emergence of Islamic banking in Turkey with first Islamic bank of Special Finance House
set up in 1985. Currently, there are four Islamic banks or Participation Banks (PB) operating
in the country having about 4% share in Turkey’s financial system.
This paper, hence, aims to explore and examine the potential relationship between financial
development in the form of Islamic and conventional banks and economic growth or
performance in Turkey for the 2005-2012 period.
The econometrics method based on various causality tests shows that there is a causal
relationship between the real economy and the financial system in the whole but also between
the economic growth and Islamic as well as conventional banking sectors. It is also located
that the contribution of Islamic banking on economic growth benefits through expansion of
the financial system but also expansion in the conventional system. This paper, hence,
provides evidence for the contribution made by financial system in general and Islamic
banking in particular on Turkey’s economy.
Key words: Islamic and conventional banking, economic growth, Turkey, causality analysis
1
I. Introduction
Islamic banking and finance has demonstrated an unprecented success since its inception as a
commercial bank in 1975. Since then, it has made important inroads into the global financial
system beyond Muslim countries. In this development, the growth impact of Islamic banking
has been a subject of discussion in a limited number of studies. Since Islamic banking and
finance represent innovation, which is considered as financial development, theoretically, it is
expected therefore to contribute to economic growth. In addition, Islamic banking and finance
helps for financial deepening in a society by providing alternative financing methods; and
also contribution to financial inclusion by brining in those sectors of the society who refrain
using conventional methods of financing. In overall, hence, Islamic banking and finance
contributes to economic growth or better economic performance through the channels
mentioned above.
This paper, hence, aims to explore and examine the potential nexus between financial system
consisting of Islamic and conventional banking and economic growth or performance in a
comparative manner in the case of Turkey.
In doing so, Section II presents the trends and development in Islamic banking in Turkey,
while Section III focuses on data and methodology.
Section IV presents the empirical
analysis in relation to various causality models, and Section V provides the conclusion.
II. Trends and developments in Islamic banking in Turkey
The first interest-free institutionalized organizations in Turkey comparable to Islamic banks
were the Special Finance Houses (SFH), established in 1985 as part of the aggressive
liberalization programme pursued during the time. The use of the term ‘bank’ was specifically
avoided to distinguish these financial institutions from conventional banks operating in the
country: as a result, SFHs were not subjected to the banks’ legal framework and they operated
2
under the directives of Cabinet Resolution, implying that banking regulations were not fully
applied to them.
Although the necessary legal framework was issued in 1983, the very first SFH, established in
1985 after the necessary by-laws issued by the government, was Albaraka-Turk, followed by
Faisal Finans in the same year: in both, Arab Gulf stakeholders had the controlling stake.
Over the years, other SFHs were established: Anadolu Finans in 1991, Ihlas Finans in 1995
and Asya Finans in 1996, all with Turkish capital and ownership. However, due to the
currency and financial crisis in the late 1990s, the banking sector went through a very difficult
phase during the period 1999–2001. In 1999, Ihlas Finans collapsed leaving a huge void in the
Islamic banking sector in Turkey. After the crisis, in 2001, Faisal Finans was acquired by
Turkish business and changed its name into Family Finans.
In the aftermath of the financial and currency crisis in in 1999 and 2000 leading to bank
failures, new regulations to strengthen the financial system was initiated. In this process,
SFHs were brought under the umbrella of the banking sector, extending to them all the related
regulations from December 1999. In May 2001, SFHs were also brought under the ‘guarantee
scheme’ applied to conventional banks. The duality of the banking system in Turkey in terms
of the assurance scheme and also the regulation continued to a certain extent until 2005.
The evolution of the legal, regulative and operative infrastructure of SFHs to fully fledged
banks in the form of PBs in 2005 is considered as a crucial step in the recognition of their
existence in the financial system but also of their contribution to the economy.
In recent years, sukuk issued by Islamic banks in Turkey proved to be very successful
attracting interest from different parts of the world. In this context, Kuveyt-Turk PB launched
in 2010 Turkey’s first sukuk (three-year) with the value of US$100 million, issued through a
special purpose vehicle in the Cayman Islands and listed on the London Stock Exchange,
3
followed by the launch of a second sukuk in October 2011 (US$350 million). In February
2011, the parliament also passed an amendment to the tax law by introducing tax neutrality
measures for sukuk al-ijara to facilitate corporate sukuk issuances in the country. The very
first sovereign sukuk issued in 2012 was a real success story.
Looking at its performances since 1985, in fact, growth has been sluggish in comparison to
the Gulf and Southeast Asian countries. The recent data demonstrate that the total assets of
Islamic banks in the financial system of Turkey has risen to 4.3%, while the same ratio for
Bahrain is 57%, for Kuwait 50%, Qatar 4%, Malaysia 18%, United Arabic Emirates (UAE)
16%, Egypt 10% and Indonesia 2% (TKBB, 2010: 29).
Table 1: International comparison of Shari’ah compliant assets
Rank
Country
Shari‘ah
Compliant
Assets $m
Rank
Country
Shari‘ah
Compliant
Assets $m
Rank
Country
2009
2010
2011
1
Iran
293 165.8
1
Iran
314 897.4 1
Iran
2
Saudi Arabia
127 896.1
2
Saudi Arabia
138 238.5 2
Saudi Arabia
3
Malaysia
86 288.2
3
Malaysia
102 639.4 3
Malaysia
4
UAE
84 036.5
4
UAE
85 622.6 4
UAE
5
Kuwait
67 630.2
5
Kuwait
69 088.8 5
Kuwait
6
Bahrain
46 159.4
6
Bahrain
44 858.3 6
Bahrain
7
Qatar
27 515.4
7
Qatar
34 676.0 7
Qatar
8
UK
19 410.5
8
Turkey
22 561.3 8
Turkey
9
Turkey
17 827.5
9
UK
18 949.0 9
UK
10 Bangladesh
7453.3
10
Bangladesh
9365.5 10
Bangladesh
Source: The Banker, 2009, November; The Banker, 2010, November; The Banker, 2011, November.
Shari‘ah
Compliant
Assets $m
387,952.57
150,945.43
133,406.38
94,126.66
79,647.85
79,647.00
52,322.38
28,015.20
19,041.79
11,677.1
In terms of international comparison, Shari‘ah compliant assets of Turkey within the ten
leading Islamic banking countries is depicted in Table 1, which shows that Turkey was ranked
ninth in 2009 and, by increasing its Shari’ah asset base in Islamic banking by 26%, Turkey
managed to move to eighth rank in 2010; and with another 24% increase Turkey managed to
keep its ranking.
4
In addition, domestic comparison with conventional banking can help to develop a better
understanding regarding the place of PBs in Turkey. Table 2, therefore, depicts the trends in
the assets of PBs over the years.
As can be seen from Table 2, the asset growth rate for the banking sector was 17.6 per cent in
2003, which was 29 per cent for the PBs. The lowest growth rate in the assets of the banking
sector was in 2009 with 13.9 per cent, while in the same year PBs grew by 30.4 per cent. As
the statistics demonstrate, in terms of trends in the growth of assets in comparison to the
conventional banking sector, PBs have been more successful. Despite such a success,
however, the role and share of PBs in the banking system remains significantly low. As Table
15.2 shows, the share of PBs in the total banking system depicted a gradual but very small
growth over the years: from 1.83 per cent in 2002 to 4.41 per cent in 2011, which is far too
low for the potential represented by the size and dynamism of the Turkish economy.
Table 2: Trends in the assets of participation banking (TRY million)
Year
Bank Assets
216 630
2002
254 863
2003
313 751
2004
406 915
2005
498 587
2006
580 607
2007
731 640
2008
833 968
2009
1 006 672
2010
2011
1 213 660
Source: TKBB (2011)
Assets of
Asset Growth of
Participation
Banks (%)
Banks
17.6%
23.1%
29.6%
22.5%
16.4%
26.0%
13.9%
20.7%
20.6%
3962
5113
7299
9945
13 730
19 435
25 769
33 628
43 339
53 600
Asset Growth of
Participation
Banks (%)
29%
42.7%
36.2%
38%
41.5%
32.5%
30.4%
28.8%
23.6%
Share of
Participation
Banks in the
Banking Sector
(%)
1.83%
2.01%
2.33%
2.44%
2.75%
3.35%
3.52%
4.03%
4.31%
4.41%
The analysis in this section, in sum, indicates that PBs have performed better than
conventional banks in terms of assets and funds raised and also by providing higher credit to
the real economy compared to conventional banks as indicated by the loan-to-deposit ratios.
5
This is further supported and evidenced by other studies, albeit limited in number, which
analysed the performance and efficiency of PBs in comparison with conventional banks. For
instance, Alpay and Hassan (2006) examined the comparative efficiency of conventional and
SFHs in Turkey for the period 1990–2000 and found that the latter were more cost-and
revenue-efficient. They also analysed and compared the performance of PBs and conventional
banks, and found that “efficiency, pure technical efficiency and scale efficiency of IFFIs
[PBs] increased over time. However, productivity and technological efficiency decreased”
(Alpay and Hasan, 2006: 14). In their study, El-Gamal and Inanoglu (2004) investigated the
relative efficiencies in the Turkish banking sector by including the SFHs for the period 1990–
2000. Their findings demonstrate that these financial institutions scored well by ranking at the
top in the domestic bank group, which included 40 banks.
In concluding, the progress and success of Islamic banking in Turkey cannot be denied,
despite a persistent adverse political culture. Contemporarily, the presence of only four PBs in
a Muslim country with a population of about 75 million and about 60 per cent urbanization
rate is a clear indicator of persistent sluggish growth, the reasons for which are investigated in
the next section through a political economy and behavioural approach.
III. Data and methodology
The Granger causality method was used to investigate the causality relationship between
Islamic banks, economic performance, the financial system, and conventional banks. Further,
this test (1969, 1980) shows the cause and effect relationship between two series. According
to this method, if the expected value of one of the variables at a given time is affected by the
past periods of the other series, then the affecting variable is defined as the Granger cause of
the affected variable.
The hypotheses that were tested using the Granger causality method are stated below.
6
H0: Y is not the Granger cause of X.
π‘Ÿ
π‘Ÿ
𝑋𝑑 = 𝛼0 + ∑ 𝛼𝑗 𝑋𝑑−𝑗 + ∑ 𝛽𝑗 π‘Œπ‘‘−𝑗 + πœπ‘‘
𝑗=1
𝑗=1
H0: X is not Granger cause of the rate of Y.
π‘Ÿ
π‘Ÿ
π‘Œπ‘‘ = 𝛼0 + ∑ 𝛼𝑗 π‘Œπ‘‘−𝑗 + ∑ 𝛽𝑗 𝑋𝑑−𝑗 + πœπ‘‘
𝑗=1
𝑗=1
The significance of the causality relationship depends on the coefficient demonstrated by
these equations. If the coefficients of the independent variable (𝛽) are significant, it means
that the Granger causality runs from the independent variable to the dependent variable. For
this causality test, the series does, however, need to be stationary and there should be no
cointegration relationship between the variables. Therefore, the stationary of the series was
assessed by the Augmented Dickey-Fuller (ADF) test; the cointegration relationship between
the variables was measured by the Johansen cointegration test. If cointegration is present
between the variables, then the error correction terms should be inserted into the models for
the causality test.
To investigate the unit root of the series that have a significant structural break, the ZivotAndrews (1992) unit root test was used. This test, which is one of the alternative unit root
tests that could be applied given that the unit root tests are not suitable variables for structural
changes, does this internally (Zivot and Andrews, 1992: 252). By using this method, the
presence of the unit root process in a series where a structural break potentially exists,
whether or not that structural break takes place, allowed the timing of the break to be
determined.
7
For the course of this study, monthly date from Turkey was used. The data duration for this
analysis covered the period from December 2005 to January 2012. December 2005 was
selected as it marks the time when the participating banks first started to operate on the same
level as the conventional banks, and it is also when the Central Bank of the Republic of
Turkey changed the definition of money supply. The monthly date set of variables cover
eighty-seven observations. For all the analyses, a real value of financial variables was used.
Customer price index (CPI, 2003=100) was used to transform the real values of financial
variables. Data for the study was obtained from the electronic data delivery system of the
Central Bank of the Republic of Turkey. The series used in this study are presented in the
table 4.
Table 4: Defining the Variables
IPI
M2
M3
AC
PCC
TCC
TDC
AI
PCI
TCI
TDI
Variables
Economic Performance
Industrial Production Index
Financial System
M2 Money Supply
M3 Money Supply
Conventional Banks
Total Asset Size of Conventional Banks
Total Credit to Private Sector of Conventional Banks
Total Credit of Conventional Banks
Total Deposit of Commercial Banks
Islamic Banks
Total Asset Size of Islamic Banks
Total Credit to Private Sector of Islamic Banks
Total Credit of Islamic Banks
Total Deposit of Islamic Banks
With the exception of the Industrial Production Index (IPI), these series were inserted into the
analysis with their logarithmic values. All variables were deseasonalised through the use of a
Cesus 12 before the tests. The stationary series was used in Granger causality tests in first
differences. For all the various aspects of the analysis, D denotes the first difference and L
8
represents a logarithm of variables. The lag length of the variables in the causality tests is
determined through the consultation of Akaike’s Information Criterion (AIC).
IV. Empirical analysis: causality models and tests
This section presents that empirical analysis and findings through a number of causality
models.
4.1.The causality between financial development and economic performance
In this section, the causality between financial development and economic growth is
evaluated; the direction of this relationship is equally evaluated.
Financial
Development
Economic
Performance
As a result of the restricted nature of the data, the IPI is taken as an indicator of the economic
performance. The table 5 and figure 1 confirm the validity of this assumption. It is observed
that both the GDP and the IPI presents a similar course of development.
Table 5: The Performance of the Real Economy
2005
2006
2007
2008
2009
2010
2011
2012
GDP
Real Value Growth Rate
90499731
96738320
6.9
101254625
4.7
101921730
0.7
97003114
-4.8
105885645
9.2
115174724
8.8
117753693
2.2
IPI
Value Growth Rate
86.2
92.48
7.3
98.95
7.0
98.34
-0.6
88.75
-9.8
100.13
12.8
110.17
10.0
112.88
2.5
9
Figure 1: Growth Rates for the GDP and the IPI
15.0
12.8
10.0
7.3
5.0
6.9
9.2
7.0
10.0
8.8
4.7
2.5
2.2
0.7
0.0
2006
2007
-5.0
2008
-0.6
2009
2010
2011
2012
-4.8
-9.8
-10.0
-15.0
gdp
ipi
A review of the line graph of the IPI in Figure 2, which is a variable employed to evaluate the
economic performance, reveals that there is a break in 2008 due to a crisis.
Figure 2: Line Graph for the IPI (After to Deseasonalise)
IP
130
120
110
100
90
80
70
2006
2007
2008
2009
2010
2011
2012
As there is the risk that such a break can distort the stationary test results, whether or not this
break is statistically significant was investigated by the Zivot-Andrews unit root test. The
results of this test are presented in the table below. As can be seen from table 6, there is a
statistically significant break in October 2010. According to the stationary test results based
on this break, this series is stationary at a 1% level of significance.
10
Table 6: The Results of the Zivot-Andrews Unit Root Test for RIP
t-stat(s)
Lag(s)
Break
DU1 p-value
-4.143243
1
2008M10
0.003046**
** denote significance at %1
This break should be isolated and refined so that the series can be used in the analyses. Figure
3 presents the actual trend and residual parts of the IPI. By doing this, the deterministic
structure was isolated from the actual value, and the volatility of the original series was left in
the residual series. RIP is a residual of IPI and it is used in tests as an IPI.
Figure 3: Line Graph for the IPI (After to Deseasonalise)
130
120
110
100
15
90
10
80
5
70
0
-5
-10
-15
-20
2006
2007
2008
Residual
2009
2010
Actual
2011
2012
Fitted
The results of the stationary tests that were conducted for the financial development indicators
are presented in Table 7. These series, which are not stationary in level, are used in the
analysis in their first difference.
Table 7: The Results of the Unit Root Test (ADF)
Variable
LM2
LM3
Level (T+I)
t- Statistic
Lag Length
-1.856613
0
-2.681704
1
First Difference (I)
t- Statistic Lag Length
-8.244114
0
-6.955822
0
Although the RIP series is stationary, whether or not there is cointegration between the series
and the financial development indicators is not analysed. The results of the Granger causality
11
tests, conducted with the financial development and economic performance variables, are
presented in table 8.
Table 8: The Results of the Granger Causality Tests on Financial Development
Causality
DLM2 does not Granger Cause RIP
RIP does not Granger Cause DLM2
DLM3 does not Granger Cause RIP
RIP does not Granger Cause DLM3
F-Statistic
2.95292
0.7944
2.71846
0.75632
Lags*
12
12
Prob.
0.0038**
0.6538
0.007**
0.6903
** denote significance at %1
These results suggest that there is a strong causality running from the financial development
to economic performance. A review of the M2 and M3 reveals that the development of the
financial system influences economic performance. This empirical evidence thus supports
“the supply-leading view” hypothesis, as follow:
Financial
Development
Economic
Performance
4.2.The Causality between the banking system and economic performance
In this section, whether the direction of the causality identified between the financial
development and economic performance also applies to the banking system, which is the
main agent in the financial system. The question as to whether this causality for conventional
banking is also significant in Islamic banking, which holds a relatively smaller place in the
system, is interesting with regard to this topic. Therefore, the causal relations between the
development of the banking system and economic performance are evaluated here.
Development
of the Banking System
Economic
Performance
To follow the development of both commercial and Islamic banking, three variables for each
of these categories were taken into account. The results of the stationary test for these
variables are presented in table 9.
12
Table 9: The Results of the Unit Root Test (ADF)
Variable
LAC
LPC
LTCC
LAI
LPCI
LTCI
Level (T+I)
t- Statistic Lag Length
-2.24573
0
-2.33057
3
-2.34585
3
-2.83589
0
-2.44526
1
-2.42909
1
First Difference (I)
t- Statistic Lag Length
-3.51993
2
-2.21248
2
-2.23849
2
-10.6404
0
-7.10213
0
-7.03618
0
The results of the Granger causality tests on the economic performance, combined with the
variables that reflect the development of both banking systems, are displayed in table 9.
Table 9: The Results of the Granger Causality Tests on the Banking System
Causality
F-Statistic
Conventional Banks
DLAC does not Granger Cause RIP
2.12611
RIP does not Granger Cause DLAC
1.48384
DLPCC does not Granger Cause RIP
2.55258
RIP does not Granger Cause DLPCC
1.02035
DLTCC does not Granger Cause RIP
2.66421
RIP does not Granger Cause DLTCC
1.11571
Islamic Banks
DLAI does not Granger Cause RIP
2.49969
RIP does not Granger Cause DLAI
1.20806
DLPCI does not Granger Cause RIP
2.41917
RIP does not Granger Cause DLPCI
1.78934
DLTCI does not Granger Cause RIP
2.4198
RIP does not Granger Cause DLTCI
1.56937
Lags*
12
12
12
7
15
13
Prob.
0.0326*
0.1634
0.0107**
0.4461
0.008**
0.37
0.0248*
0.3117
0.0136*
0.0727
0.0142*
0.1305
* and ** denote significance at %5 and %1
The results of the Granger causality tests on the relationship between the variables that reflect
the development of the two banking systems and the economic performance are similar. The
direction of the causality for both conventional and Islamic banking runs towards economic
performance. This is also the case for the three alternative variables that illustrate the
development of banking. To this end, the development of both banking systems is the Granger
cause of economic performance. This seems to be consistent with the results of the causality
tests between financial development and economic performance. Given that the banking
system is the major component of the Turkish financial system, this indicates that the causal
13
influence on financial development over economic performance should also be the same for
the development of the banking system; indeed, the results confirm this assumption.
Development of
Conventional Banking
Economic
Performance
Development of
Islamic Banking
Economic
Performance
These findings present another pertinent aspect: despite having a small share in the financial
system, the causality direction for Islamic banking is similar to that of the conventional
banking system. For this reason, it could be argued that despite their relatively insignificant
share, these banks do actually have a meaningful impact on, and influence over, the economic
performance. Another key finding is that the two variables on the credits by Islamic banking
institutions have a relatively delayed influence in terms of causality over the economic
performance.
4.3. The causality between the banking system and financial development
Here, the causality between the development of the financial system and the development of
the banking system is evaluated. These analyses are then considered for both the commercial
and Islamic banking system. Since the causality that was identified between the development
of banking and economic performance is similar to that which was defined between financial
development and economic performance, the direction of the causality between financial
development and the development of banking is thus taken into account. In other words,
whether financial development has a direct or reverse impact upon the development of the
banking system poses an interesting question.
Financial
Development
Development
of the Banking System
14
The results of the cointegration test between the financial development variables and the
alternative variables, which reflect the development of both banking systems, are presented in
table 10. No cointegration is identified between the variables in the models.
Table 10: The Results of the Johansen Cointegration Tests
Series
LM2 LAC
LM3 LAC
LM2 LPCC
LM3 LPCC
LM2 LTCC
LM3 LTCC
LM2 LAI
LM3 LAI
LM2 LPCI
LM3 LPCI
LM2 LTCI
LM2 LTCI
Lag Eigenvalue
None
At most 1
None
At most 1
None
At most 1
None
At most 1
None
At most 1
None
At most 1
None
At most 1
None
At most 1
None
At most 1
None
At most 1
None
At most 1
None
At most 1
2
2
2
2
2
2
2
2
2
2
2
2
0.110328
0.014122
0.083217
0.01162
0.044813
0.014551
0.042783
0.013727
0.044442
0.015304
0.044444
0.015018
0.057554
0.03663
0.067657
0.040974
0.072567
0.03329
0.075251
0.034153
0.07515
0.035481
0.077548
0.036531
Trace
Critical
Statistic Value (%5)
11.01452 15.49471
1.194703 3.841466
8.280087 15.49471
0.981798 3.841466
5.082472 15.49471
1.231236 3.841466
4.833983 15.49471
1.161077 3.841466
5.114152 15.49471
1.295492 3.841466
5.089817 15.49471
1.271048 3.841466
8.113952 15.49471
3.134692 3.841466
9.398897 15.49471
3.514298 3.841466
9.172112 15.49471
2.843955 3.841466
9.490564 15.49471
2.918966 3.841466
9.596915 15.49471
3.034533 3.841466
9.906542 15.49471
3.126065 3.841466
MaxCritical
Eigen
Value (%)
9.819819 14.2646
1.194703 3.841466
7.298289 14.2646
0.981798 3.841466
3.851236 14.2646
1.231236 3.841466
3.672906 14.2646
1.161077 3.841466
3.81866 14.2646
1.295492 3.841466
3.818768 14.2646
1.271048 3.841466
4.97926 14.2646
3.134692 3.841466
5.884599 14.2646
3.514298 3.841466
6.328157 14.2646
2.843955 3.841466
6.571597 14.2646
2.918966 3.841466
6.562381 14.2646
3.034533 3.841466
6.780477 14.2646
3.126065 3.841466
The results of the Granger causality tests that were conducted with these variables are shown
in table 11.
From the review of table 11, it is possible to draw the following conclusions:
As the empirical evidence indicates, M2 proved to have a more significant causal relationship
than M3 in the tests. It could therefore be concluded that the causality between M2 monetary
size and the development of banking is greater than the causality relevant to M3 monetary
size.
15
Table 11: The Results of the Granger Causality Tests between Financial Development
and the Banking System
T. Credits
P. Credits
Actives
T. Credits
P. Credits
Actives
Causality
F-Statistic
Conventional Banks
DLM2 does not Granger Cause DLAC
1.53353
DLAC does not Granger Cause DLM2
3.6207
DLM3 does not Granger Cause DLAC
1.45882
DLAC does not Granger Cause DLM3
2.63351
DLM2 does not Granger Cause DLPCC
4.05395
DLPCC does not Granger Cause DLM2
0.99403
DLM3 does not Granger Cause DLPCC
2.25736
DLPCC does not Granger Cause DLM3
0.10191
DLM2 does not Granger Cause DLTCC
9.0614
DLTCC does not Granger Cause DLM2
1.99289
DLM3 does not Granger Cause DLTCC
6.3551
DLTCC does not Granger Cause DLM3
0.78257
Islamic Banks
DLM2 does not Granger Cause DLAI
2.15252
DLAI does not Granger Cause DLM2
1.003
DLM3 does not Granger Cause DLAI
2.13682
DLAI does not Granger Cause DLM3
1.26394
DLM2 does not Granger Cause DLPCI
1.94463
DLPCI does not Granger Cause DLM2
1.01497
DLM3 does not Granger Cause DLPCI
2.1939
DLPCI does not Granger Cause DLM3
0.90266
DLM2 does not Granger Cause DLTCI
2.94862
DLTCI does not Granger Cause DLM2
1.20243
DLM3 does not Granger Cause DLTCI
3.46778
DLTCI does not Granger Cause DLM3
1.28098
Lag
2
1
2
3
1
1
7
8
4
4
1
1
Prob.
0.2221
0.0313*
0.2306
0.1085
0.0211*
0.3747
0.0885
0.9587
0.0035**
0.1618
0.0136*
0.3789
0.0504*
0.4376
0.0455*
0.279
0.1121
0.4054
0.078
0.467
0.0897
0.276
0.0662
0.261
* and ** denote significance at %5 and %1
Causality is identified in all three of the alternative indicators of banking development that are
relevant to commercial banking; causality is, however, identified in bank actives only within
Islamic banking. No causality is therefore identified in Islamic banking between credits and
financial development. In other words, it can be stated that the causality between Islamic
banking and financial development is weaker compared to that shown for Islamic banking.
Further, this is, perhaps, an extension of the relatively low share held by Islamic banking in
the financial system.
16
In terms of the direction of the causality, it is identified in the commercial banks from the
change in the actives towards financial development; this form of causality is, however,
reversed in Islamic banking.
Commercial Banking
Total Actives
Financial
Development
Islamic Banking
Total Actives
Financial
Development
The direction of the causality in commercial banks, from bank actives towards financial
development, runs in the opposite direction for commercial banking credits. The advance in
the financial development is the Granger cause of the change in the commercial banking
credits. Since the change in the monetary size influences the credits, this is consistent with the
monetary transfer mechanisms. No similar causality is, however, identified in the Islamic
banking credits. (It is important to study how the monetary transfer channels work for the
Islamic banks in Turkey.)
Development of
Conventional Banking
Financial
Development
Development of
Islamic Banking
Financial
Development
4.4. The causality between the Islamic and conventional banking system
For this section, the causality between the two banking systems is evaluated. It should be
noted that the direction of the causality between the two major components of the dual
banking system is worth exploring because of the causality identified (in the previous section)
from financial development towards Islamic banking and from commercial banking towards
financial development.
Development of
Conventional Banking
Development of
Islamic Banking
17
The results of the cointegration tests that were conducted are illustrated in table 12: no
cointegration causality is identified between the variables.
Table 12: The Results of the Johansen Cointegration Tests
Series
Lag Eigenvalue
None
At most 1
None
LPCC LPCI
At most 1
None
LTCC LTCI
At most 1
LAC LAI
0.07959
0.01733
0.048296
0.030913
0.049414
0.029671
2
2
2
Trace
Statistic
8.435092
1.468507
6.795724
2.637646
6.786963
2.530125
Critical
Value (%5)
15.49471
3.841466
15.49471
3.841466
15.49471
3.841466
MaxEigen
6.966585
1.468507
4.158079
2.637646
4.256838
2.530125
Critical
Value (%)
14.2646
3.841466
14.2646
3.841466
14.2646
3.841466
The findings of the causality tests between the development indicators on the two banking
systems are revealed in table 13:
Table 13: The Results of the Granger Causality Tests Between the Development of the
Islamic and Conventional Banking System
Causality
DLAC does not Granger Cause DLAI
DLAI does not Granger Cause DLAC
DLPCC does not Granger Cause DLPCI
DLPCI does not Granger Cause DLPCC
DLTCC does not Granger Cause DLTCI
DLTCI does not Granger Cause DLTCC
FStatistic
2.81693
1.58728
1.08106
0.59185
0.92398
0.40091
Lag
3
4
4
Prob.
0.0447*
0.1994
0.3722
0.6696
0.4548
0.8074
* denote significance at %5
A review of the table which contains the results of the causality between the development
indicators of the two banking systems reveals that no causality is determined in the credits,
yet a causality is identified in the banks’ actives.
Commercial
Banks’ Actives
Islamic
Banks’ Actives
The development in the actives of the commercial bank is the Granger cause of the Islamic
banking actives at a 5% level of significance. This finding supports the results presented in
the previous section. Indeed, the development in the commercial banks’ actives influences the
18
financial system, and the development in the financial system has an impact on Islamic
banking, which is the other component in the system.
4.5. The causality within the bank deposits of the Islamic and conventional banking
system
Deposits are the main source of funding in the banking system, for there is not an Islamic
national money market within the Turkish economy; in addition, the Islamic interbank market
and the international Islamic money market are relatively shallow. For these reasons, deposits
are a more important source of funding for Islamic banking than they are for commercial
banking. The development of deposits for both banking systems is evaluated in table 14 and
figure 4.
Table 14: The Performance of the Deposits for Islamic and Commercial Banks (20052012)
2005
2006
2007
2008
2009
2010
2011
2012
Ave
2012-005
Islamic Banks
Commercial Banks
Share of Deposits Growth Rate of Share of Deposits
Growth Rate of
to Bank Liabilities
Real Deposits
to Bank Liabilities
Real Deposits
85.23
-64.97
-82.18
20.79
65.43
11.59
76.73
20.94
65.03
5.93
73.69
15.87
65.79
14.35
78.94
32.50
64.91
5.11
77.36
15.84
63.97
10.40
70.78
11.40
61.65
9.17
69.95
13.33
60.72
2.18
76.86
18.67
64.06
8.39
-227.98
74.96
It is apparent that the share of the deposits in the total passives is higher for Islamic banking
than it is for its commercial counterpart, yet the share of the deposits has declined by 15%
from the start of the term through to its end; this statistic could be interpreted as evident of the
declining significance of the deposits as a source of funding.
19
Figure 4: The Share of the Deposits to Bank Liabilities of Islamic and Conventional
Banks
90
80
70
60
50
40
30
20
10
0
85.23
82.18
78.94
76.73
77.36
73.69
64.97
2005
65.79
65.03
65.43
2006
70.78
2007
2008
69.95
64.91
63.97
61.65
60.72
2009
2010
2011
2012
Islamic Banks
Commercial Banks
Ave. of IB
Ave. of CB
A review of the liabilities side of the consolidated balances of the Islamic banks reveals that
this finding could be associated with the diversification of the funding resources in Islamic
banks.1
Figure 5: The Growth Rates for the Total Deposits of Islamic and Conventional Banks
35
32.50
30
25
20.79
20.94
20
10
15.84
15.87
14.35
15
5.93
5
11.40
10.40
11.59
13.33
9.17
5.11
2.18
0
2006
2007
2008
2009
2010
2011
Islamic Banks
Commercial Banks
Ave. of IB
Ave. of CB
2012
In figure 5, the growth rate for the real value of the funds collected in the two banking
systems is compared. The average growth rate of the funds collected by Islamic banks in this
1
A review of the consolidated balances of the Islamic banks in the period between 2005 and 2012 indicates that
there has not been a decline in the share of the capital, yet a decline has been seen in the total share of the
deposits. Therefore, the decline in the deposits has not been substituted by an increase in the capital. In the same
period, the share of the credits in the total liabilities in Islamic banks has alternatively increased from 0.8 percent
in 2005 to 9.65 percent in 2012.
20
period is almost 19%, yet it is only eight point 5% for the commercial banks. Despite the
decline in the share of liabilities, the Islamic banking deposits have increased at a greater rate
than the commercial bank deposits. A comparison between the beginning and end of the terms
shows that the funds collected in the Islamic banks have increased by 228% and 75% in the
commercial banks. This refers to the threefold growth performance in the deposits. (It could
be argued that the decline in the interest rates, following the relative success in the inflationist
period, supports this achievement).
It is, thus, important to review the causality between the deposits of both banking systems and
the economic and financial development. The stationary test results of the bank deposits
included at this stage in the analyses are depicted in table 15. Echoing the other financial
variables taken into account throughout this study, these series are not stationary in their
level; consequently, the first differences are taken into account in the analyses.
Table 15: The Results of the Unit Root Test (ADF)
Variable
LCD
LID
Level (T+I)
t- Statistic Lag Length
-2.85503
0
-2.16434
0
First Difference (I)
t- Statistic
Lag Length
-9.68549
0
-10.0186
0
The results of the cointegration tests on the variables where the causality with the deposits is
to be determined are presented in table 16: no cointegration is determined.
Table 16: The Results of the Johansen Cointegration Tests
Series
LM2 LCD
LM3 LCD
LM2 LID
LM3 LID
Lag Eigenvalue
None
At most 1
None
At most 1
None
At most 1
None
At most 1
2
2
2
2
0.082558
0.010648
0.058253
0.014001
0.081785
0.023542
0.080302
0.028907
Trace
Statistic
8.137215
0.899253
6.225956
1.184407
9.168419
2.001182
9.495549
2.463956
Critical
Value (%5)
15.49471
3.841466
15.49471
3.841466
15.49471
3.841466
15.49471
3.841466
MaxEigen
7.237962
0.899253
5.041549
1.184407
7.167237
2.001182
7.031593
2.463956
Critical
Value (%)
14.2646
3.841466
14.2646
3.841466
14.2646
3.841466
14.2646
3.841466
The results of the causality test between the funds collected in both banking systems and
between financial development and economic performance are exhibited in the following
table.
21
Table 15: The Results of the Granger Causality Tests on the Bank Deposits
Causality
F-Statistic
DLCD does not Granger Cause DLID
5.19466
DLID does not Granger Cause DLCD
0.94768
Deposits and Economic Performance
RIP does not Granger Cause DLCD
1.32743
DLCD does not Granger Cause RIP
3.03348
RID does not Granger Cause DLID
1.87794
DLID does not Granger Cause RID
0.2164
Deposits and Financial Development
DLM2 does not Granger Cause DLCD
5.47342
DLCD does not Granger Cause DLM2
1.93153
DLM3 does not Granger Cause DLCD
6.63085
DLCD does not Granger Cause DLM3
0.45
DLM2 does not Granger Cause DLID
2.15567
DLID does not Granger Cause DLM2
0.291
DLM3 does not Granger Cause DLID
3.37194
DLID does not Granger Cause DLM3
0.58584
Lag
1
3
1
2
2
2
2
Prob.
0.0253*
0.3332
0.2718
0.0344*
0.1743
0.643
0.0059**
0.1517
0.0022**
0.6393
0.1226
0.7483
0.0393*
0.559
* and ** denote significance at %5 and %1
From a review of the table 15, it is possible to evaluate the results of the causality tests as
follows:
Causality is determined between the commercial deposits and the Islamic deposits. A change
in the commercial deposits at a 5% level of significance is the Granger cause of Islamic
deposits.
Commercial
Banks’ Deposits
Islamic
Banks’ Deposits
In the economies that employ dual banking systems, the bank customers have arbitrage
opportunities, which lead to causality between the deposits of these two banking systems.
Empirical studies show that within dual banking systems the interest rates on deposits have an
impact upon the Islamic banking deposits.2 Similar empirical evidence is found in other works
2
Several empirical studies analyse the effect of the altered interest rates on deposits in Islamic banks within
several countries where these same banks operate in a dual banking system (Chong and Liu, 2009; Bacha, 2004;
Kaleem and Isa, 2003; Rosly, 1999; Haron and Ahmad, 2000; Kasri and Kassim, 2009; Sukmana and Kassim
2010; Zaionol and Kassim, 2010).
22
on the Turkish economy (Ergeç and Arslan, 2013). The direction of the causality determined
in this study therefore correlates with these results.
A review of the causality between the bank deposits and the economic performance reveals
that there is a causality from the commercial banking deposits towards the IPI. Given the
sensitivity of both the IPI to the credits and the sensitivity of the credits to the bank deposits,
this is an expected result. A similar causality is, however, not identified between the Islamic
banking deposits and the IPI.
Commercial
Banks’ Deposits
Economic
Performance
A review of the causality between the bank deposits and the financial development indicators
reveals that a causality exists for both commercial and Islamic banking, from financial
development to deposits towards bank deposits indicating that financial development expands
the financial opportunity space for banks to expand their deposits.
Banks’ Deposits
Financial Development
For commercial banks, this causality is, however, tested for two financial development
indicators at a 1% level of significance, whereas it is identified for Islamic banking in the
LM3 variable at a 5% level of significance. It could therefore be suggested that this result is
more definitive for the commercial banking system.
V. Conclusion
The figure 6 summarises the findings of this study by directly referencing the mechanism of
the identified relationship between the financial system, the conventional and Islamic banks,
and the real economy.
23
Figure 6: Overall Results
Financial System
Conventional Banks
Deposits
Credits
Real Economy
Islamic Banks
Deposits
Credits
Financial System
As detailed above and summarised in figure 6, there is a direct and uni-directional causality
running from financial development to economic performance in Turkey; thus financial
expansion in Turkey has played an important role providing the necessary sources for
economic growth over the period covered.
The study also found that there is a uni-directional causality between conventional banking
and economic performance; and Islamic banking and economic performance. In both the
cases causality runs from banking sector to economic performance in terms of growth in real
economy.
The econometric analysis in this study also shows that there is a uni-directional causal
relationship running from commercial banking activity to Islamic banking activity. This can
be explained by the enormous size of conventional banking industry as compared to Islamic
finance in Turkey. This is further substantiated by the causality running from commercial
24
bank deposits to Islamic bank deposits implying that conventional banking creates the
financial pool as an opportunity space from which Islamic banks also benefits.
As discussed in a detailed manner, the results indicate that there is a causal relationship from
financial development towards bank deposits in the case of both Islamic and conventional
banks. This can be explained by the fact that financial development through financialisation
creates opportunity space for economic expansion and hence deposits in the economy.
Providing a comprehensive econometric analysis, this study provides important findings for
the financial system and its impact on economic performance in Turkey in general and the
nexus between Islamic banking and economic performance in particular. This evidences the
important contribution and value added of Islamic banks in Turkey despite their rather small
size in the financial system.
This study, hence, confirms that the regulatory development of Islamic banking in Turkey
went through different stages determined by economic and financial factors as well as the
political attitude towards the sector. While the evidence provided indicates their contribution
to the economy, the potential of Islamic banking in Turkey has not yet been fully explored.
References
Alpay, S. and Hassan, M. K. (2006). ‘A comparative efficiency analysis of interest free
financial institutions and conventional banks: a case study on Turkey’, Paper
presented at the ERF’s 13th Annual Conference, 16–18 December, Kuwait.
Arslan, B. G. and Ergeç E. H. (2013, forthcoming) “The Causality Between Returns of
Interest-Based Banks and Interest Free Banks: The Case of Turkey”, An earlier
version of this paper was presented in ICEF-2011 in Δ°stanbul in 2011.
Asutay, Mehmet (2013). “Developments in Islamic Banking in Turkey: Emergence,
Regulation and Performance”, in Valentino Cattelan (ed.), Islamic Finance in Europe:
Towards a Plural Financial System. Cheltenham: Edward Elgar.
Bacha, O. I. (2004) “Dual banking systems and. interest rate risk for Islamic. Banks”, MPRA
Paper No. 12763.
25
Chong, B. S. and Liu, M. H. (2009) “Islamic banking: interest-free or interest-based?”,
Pacific-Basin Finance Journal, 17, 125-144.
El-Gamal, M. and Inanoglu, H. (2004), ‘Interest-free banking in Turkey: boon or bane for the
financial sector’, Proceedings of the Fifth Harvard University Forum on Islamic
Finance, Cambridge, MA: Center for Middle Eastern Studies, Harvard University.
Ergeç E. H. and Arslan, B. G. (2013) “Impact of Interest Rates on Islamic and Conventional
Banks: The Case of Turkey”, Applied Economics, 45 (17), 2381-2388.
Granger, C. W. J. (1969) “Investigating Causal Relations by Econometric Models and CrossSpectral Methods”, Econometrica, 37 (3), 424-38.
Granger, C. W. J. (1980) “Testing for Causality: A Personal Viewpoint”, Journal of
Economic Dynamics and Control, 2, 329-352.
Haron, S. and Ahmad, N. (2000) “The effects of conventional interest rates and rate of profits
on funds deposited with Islamic banking system in Malaysia”, International Journal of
Islamic Financial Services, 1, 1-7.
Kaleem, A. and Isa, M.M. (2003) “Causal Relationship Between Islamic and Conventional
Banking Instruments in Malaysia”, International Journal of Islamic Financial Services,
4 (4), 1-8.
Kasri, R. A. and Kassim, S. Hj. (2009) “Empirical determinants of saving in the Islamic
banks: evidence from Indonesia”, Journal of King Abdulaziz University: Islamic
Economics, 22, 181-201.
Rosly, S. (1999) “Al-bay bithaman ajil financing: impacts on Islamic banking performance”,
Thunderbird International Business Review, 41, 461-480.
Sukmana, R. and Kassim, S. H. (2010) “Roles of the Islamic banks in the monetary
transmission process in Malaysia”, International Journal of Islamic and Middle
Eastern Finance and Management, 3, 7-19.
The Banker (2009; 2010; 2011). The Top 500 Islamic Financial Institutions. London:
Financial Times
TKBB (Participation Banks Association of Turkey) (2009, 2010, 2011), Participation Banks
2010. Istanbul: TKBB.
Zainol, Z. and Kassim S. H. (2010) “An analysis of Islamic banks’ exposure to rate of return
risk”, Journal of Economic Cooperation and Development, 31, 59-84.
Zivot, E. and Andrews, K. (1992) “Further Evidence On The Great Crash, The Oil Price
Shock, and The Unit Root Hypothesis”, Journal of Business and Economic Statistics,
10 (10), 251–70.
26
Download