Conventional banking and participation banking in terms of financial stabilty: A comparative analysis

The pursuit of financial stability has become the most important goal of modern macroeconomic policies. In particular, the 2008 Global Financial Crisis emphasized the importance of understanding financial stability by emphasizing the banking sector in the context of managing credit risk. In this context, banks are the most important intermediary institution of the financial system. Two banking segments stand out in the current view of the banking sector: conventional banking and participation banking. The success of the financial system for world economies depends on financial stability. For this reason, it has become important to compare these two banking sectors in terms of financial stability. For this purpose, in this study, the conventional banking sector and the participation banking sector, which operate together in the Turkish banking sector, were analyzed in terms of credit risk. The analysis was carried out with monthly data for the period 2005:M1-2020:M6. In the modeling, depending on the literature, the dependent variables were chosen as the non-performing loans ratio for both banking sectors, on a sectoral basis. As independent variables, interest rates, consumer confidence index, oil prices, unemployment rates, monthly minimum wage in dollars, basket currency volatility and real exchange rate were preferred. Later, credit risk models were made using annual data for the banking sector of Bahrain, United Arab Emirates, Qatar, Saudi Arabia and Kuwait, which are included in the Gulf Cooperation Council (GCC). In the models made for the GCC countries, depending on the literature, as dependent variables; has been chosen as the non-performing loans ratio for both banking sectors, on a sectoral basis. Gross domestic product growth rate, unemployment rate, inflation rate, real exchange rate and oil prices were preferred as independent variables. Related models were established to determine the cointegration and causality relationship between the variables. Accordingly, cointegration analysis was carried out with the AARDL Boundary Test for the banking sectors of Turkey, United Arab Emirates, Saudi Arabia and Kuwait. In addition, Granger Causality Test analysis was performed in all countries included in the analysis. As a result of the study, two important conclusions were reached. Accordingly, macroeconomic variables have the power to explain non-performing loans by countries and two banking sectors. According to the second result, non-performing loans of conventional banks are relatively more sensitive to changes in macroeconomic variables compared to participation banks.