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Differentiation of monetary transmission mechanism in a dual banking system: evidence from Turkey

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Date
2023
Authors
SDG:
Abstract
Banks' behaviors differ depending on the nature of their operational processes and unique business models. As financial intermediaries, banks play an important role in the monetary transmission mechanism, especially through the credit channel, and the behavior of Islamic banks as well as conventional banks should be considered in countries with dual banking systems where the Islamic financial ecosystem is also being developed. This paper examines whether the role of conventional banks and participation banks in the monetary transmission mechanism in Turkey is different and shows whether the risk and credit behavior of participation banks has changed, especially with access to the liquidity facilities of the Central Bank of the Republic of Turkey. The dataset is compiled quarterly for the period 2005Q1-2022Q4, with 2005Q1 being the period in which participation banks began offering financing under the Banking Act. In line with the studies in the literature on monetary transmission mechanism, the variables used for the analysis are gross domestic product, consumer price index, asset price index, aggregate credits, conventional credits, Islamic financing, and weighted average cost of financing. In the empirical methodology, vector autoregressive models and structural vector autoregressive models are conducted in accordance with the relevant literature by uncovering various diagnostic tests and prior information. The empirical results reveal that Islamic financing is affected by an interest rate shock faster but to a lesser extent than conventional loans, and this result is consistent with the studies in the literature. The fact that conventional banks adjust lending and deposit rates faster than participation banks provides them with a better opportunity to manage liquidity compared to participation banks, and also attracts the customers seeking real returns in an inflationary period. Participation banks, which have a higher proportion of FX-denominated deposits in total liabilities, are more sensitive to changes in asset prices. In addition, participation banks with access to CBRT's liquidity facilities play a more active role in the monetary transmission mechanism and are more sensitive to interest rate risks.
Keywords
Banks , Monetary transmission , Islamic banks , Turkey , Project paper (eMIF)
Citation
Can, U. (2023). Differentiation of monetary transmission mechanism in a dual banking system: evidence from Turkey (Master dissertation). INCEIF, Kuala Lumpur. Retrieved from https://ikr.inceif.org/handle/INCEIF/3943
Publisher
INCEIF

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