Review of central banks from the perspective of interest-free banking: New model suggestions for the CBRT

The Central Bank of the Republic of Turkey (CBRT) monetary policy instruments (open market transactions, foreign exchange market transactions, lender of last resort transactions) are interest-based and are mostly aimed at conventional banking activities. Interest-free banks are institutions that are based on Islamic principles and, accordingly, try to channel their activities to economic values through interest-free methods. Interest-free banks cannot benefit from the CBRT's interest-based monetary policy tools due to their own operating principles and the principle of no interest, and therefore cannot carry out liquidity management within the CBRT. The fact that interest-free banks do not have the same opportunities in liquidity management as conventional banks within the CBRT creates an unfair competition environment for interest-free banks. For this reason, within the scope of the study, the effect of the CBRT's monetary policy instruments on the profitability of conventional banks was tried to be determined. In this way, the gains that conventional banks have achieved as a result of using these tools and the losses that interest-free banks have experienced as a result of not being able to use these tools have been tried to be revealed. Then, alternative interest-free model proposals to the CBRT's existing monetary policy instruments that will allow interest-free banks to carry out liquidity management within the CBRT are presented. The study primarily tried to determine the effect of CBRT monetary policy instruments (repo, reverse repo, intraday liquidity, foreign exchange deposit), which cannot be used by interest-free banks but can be used by conventional banks, on the profitability of conventional banks. ARDL bounds test analysis was used to measure the impact of selected monetary policy instruments on the profitability of conventional banks. According to the analysis results, it has been observed that there is a cointegration between the selected monetary policy instruments and the profitability of conventional banks, and that repo, reverse repo and intraday liquidity instruments positively affect the profitability of conventional banks in the long term. After these findings obtained as a result of the analysis, the interest-free monetary policy tools offered to interest-free banks by the central banks of the countries that are pioneers in the field of interest-free banking (such as Malaysia, Bahrain, England, UAE) were examined. In addition, the CBRT's monetary policy instruments were examined within the scope of interest-free banking principles. In this regard, a new interest-free monetary policy tools model proposal to the CBRT for the monetary policy tools that can and cannot be used by interest-free banks (interbank mudaraba investment, karz based on inflation difference, collateralized murabaha method, proxy investment method, ijarah sukuk, commodity murabaha method, murabaha method and It is presented as swap application). Thanks to the interest-free monetary policy model suggestions offered, interest-free banks will be able to carry out liquidity management within the CBRT. Finally, within the scope of the study, a monetary transmission mechanism model proposal that includes both banking types within the dual banking structure is presented.. It is thought that this study will contribute to increasing the credit opportunities of interest-free banks by expanding the monetary policy tools of central banks and will lead to an increase in the economic added value of the country.