Are Islamic and conventional banks decoupled? Empirical evidence from Turkey

• Published in: International journal of emerging markets 2024-10, Vol.19 (10), p.3063-3087
• Main Authors: Khan, Shabeer, Aslan, Hakan, Khan, Uzair Abdullah, Bhatti, M.I.
• Format: Article
• Language: English
• Subjects: Assets; Banking industry; Banking system; Economic growth; Islam; Islamic financing; Policy making; Profit margins; Profitability; Tests
• ISSN: 1746-8809; 1746-8817
• DOI: 10.1108/IJOEM-08-2022-1233

PurposeThis study investigates the determinants of net interest margin (NIM) and tests the decoupling hypothesis in Turkey's Islamic and conventional banks.Design/methodology/approachThis study has employed a panel quantile model (PQM) to assess the net interest margin (NIM) and test the decoupling hypothesis in the dual banking system of Turkey.FindingsThe empirical results show that the impact of equity is positive for both Islamic and conventional banks but relatively more robust for Islamic banks. Moreover, it is observed that return on assets has a positive association with NIM in both types of banking systems. Interestingly, the impact increases from lower to higher quantiles, but a higher acceleration rate is observed for Islamic banks. The study also finds that, as bank stability increases, NIM decreases for both groups of banks but more stably for Islamic banks, resulting in lower margins than conventional banks. Thus, the paper confirms the decoupling hypothesis and suggests that, to increase profit margins, Islamic banks need to increase assets and equity.Practical implicationsThe paper confirms the decoupling hypothesis and suggests that to increase profit margin, Islamic banks need to increase assets and equity.Social implicationsSince both equity and assets contribute positively to interest margins, policymakers in the industry need to increase the size of equity and assets to get maximum returns.Originality/valueThis is one of the first studies to investigate NIM's determinants and test the decoupling hypothesis in the Turkish dual banking system using a non-parametric MCMC panel quantile regression (QRM) model.