Profitability and stability trade off – IBs vs CBs in Turkey – what differences ?

NEIFAR, MALIKA (2020): Profitability and stability trade off – IBs vs CBs in Turkey – what differences ?

Abstract

This paper consider Turkish banks case study over the period 2005–2014. To distinguish between interest-free and conventional banks, we use two-sided t-test, Multi-dimension figures, regression comparison method and Dynamic Fixed Effect (DFE) model. The long run comparison analysis [based on t-test, on regression and on Multi-dimension figures] between interest-free banks (IBs) and conventional banks (CBs) of bank specific factors indicates that there are difference between Islamic and conventional banks behavior. Both first methods show that Interest-free banks are riskier, have higher liquidity and are more capitalized. Univariate analysis (t-test based Comparison) shows in addition that interest-free banks are less stable, but are more solvent. While regression based Comparison analysis show that IBs are more profitable. Multi-dimension figures comparisons analysis show that Post GFC 2008, Islamic Banks are less stable, more solvent, and more liquid than CBs. Large IBs outperform Small IBs in term of profitability. But in term of asset quality measured by NPL, LTD and LLR, Small IBs outperform Large IBs. Comparing CBs and IBs in DFE model, from GMM results, it is clear that there is no bilateral directional relationship between stability (Z-score) and profitability (ROA). Stability is significantly sensitive to the increase of profitability only for CBs, while Profitability is significantly sensitive to the increase of Z-score only for IBs. Post GFC, IBs are more stable while CBs are less profitable. Size has positive effect on profitability outcome for IBs. Depreciation of Turkish money and inflation have negative effect on CBs’ profitability.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial stability, Profitability, interest-free banking, GFC, GMM, Multi-dimension figures comparisons, PVAR, SURE, Dynamic Fixed Effect (DFE) model
• Subjects: G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; Z - Other Special Topics > Z1 - Cultural Economics ; Economic Sociology ; Economic Anthropology > Z12 - Religion

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