Measuring The Financial Stability of Islamic and Conventional Banks in Turkey

ABSTRACT: The objective of this study is measure and compare the financial stability of Islamic and conventional banks operating in Turkey for the period of 2006 to 2013.The sample consist of twenty four banks, including four Islamic banks and twenty conventional banks. The study focus on three kinds of variables, bank specific, banking sector, and macro- economic. Variables of banks are z-score, total assets, ratio of credits to assets, cost to income ratio, and income diversity. The variables of macroeconomic level are real economic growth and Inflation rate. The variables of the banking sector are Herfindahl index of total assets and share of Islamic banks in the bank sector. The study builds on quantitative tools using panel regression in which the z-score used as a proxy for financial stability. We find that large commercial banks have financial stability, less than small commercial banks, large Islamic banks have financial stability, less than large commercial banks, and large Islamic banks tend to be financially stronger than small Islamic banks. Also, there are a negative relationship between financial stability and the size of the bank. Banks which have high loan to asset ratios moves toward low index of financial stability. Greater operating cost to income ratio have a positive sign, greater operating cost to income ratios lead to deteriorate financial stability index. Income diversity leads to decrease financial stability in banks operating in Turkey. Banks operating in Turkey with higher Islamic bank share have contributed effectively to improve the financial stability through the diversification of their assets. Regarding the macroeconomic variables (GDP, inflation) have significant effects on stability, which explains the importance of financial and economic policies of the government in increase the financial stability of the banks operating in Turkey. Keywords: Islamic Banking, Conventioal Banking, Financial Stability. …………………………………………………………………………………………………………………………