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BANK LENDING CHANNEL IN A DUAL BANKING SYSTEM:WHY ARE ISLAMIC BANKS SO RESPONSIVE?

Ahmet Aysan (), Mustafa Disli and Huseyin Ozturk

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We examine the interest rate sensitivity of both deposits and credits at Islamic and con- ventional 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 are substantially larger than that of con- ventional 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 con- sider the opportunity cost of monetary policy rates is unbearable. At 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 favorable attitude of Islamic banks towards 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.

Keywords: Lending channel; Monetary transmission; Islamic banks; SMEs (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ara, nep-cwa, nep-mac and nep-mon
Date: 2017-05
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Journal Article: Bank lending channel in a dual banking system: Why are Islamic banks so responsive? (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:17/938

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