Measuring the Financial Stability of Islamic and Conventional Banks in Turkey

Abstract

The objective of this study is to measure and compare the financial stability of Islamic and conventional banks operating in Turkey for the period of 2006–2015. The sample consists of twenty-nine banks, including five Islamic and twenty four conventional banks. The study focus on three kinds of variables: bank specific, banking sector, and macroeconomic. The study builds on quantitative tools using panel regression in which the z-score used as a proxy for financial stability. We find that financial stability for large commercial banks is less than for small commercial banks, and financial stability for large Islamic banks is less than for large commercial banks. Small Islamic banks tend to be financially more stable than large Islamic banks, large Islamic banks financial stability is less than large commercial banks, and small Islamic banks tend to be financially more stable than large Islamic banks. The major results show that the existence of a financial crisis has a negative and significant impact on financial stability of banking sector in Turkey. The findings also indicate that the bank size, loan to asset ratios, cost to income ratio, income diversity and HHI have a negative and significant impact on financial stability of banks operating in Turkey. Banks operating in Turkey with higher Islamic banks’ share have contributed effectively to improve the financial stability in turkey. The study showed that the oil prices and political stability have a negative and significant effect, while stock prices have a positive and significant effect on the financial stability of the banks operating in Turkey. Macroeconomic variables GDP and inflation have significant effects on stability, which explains the importance of financial and economic policies of the government in increasing the financial stability.