Determinants of performance of participation and conventional banks in Turkey: A dynamic GMM approach

This research examines the impact of bank characteristic as well as macroeconomic determinants on the profitability of interest-free banks in Turkey. One-step system GMM (GMM) method was used to analyze the data collected from 30 banks in Turkey: 5 Participation and 25 Conventional banks between 2010 and 2018 in order to understand the determinants of interest-free and Conventional banks profitability in Turkey. Return on Average Assets (ROAA), Return on Average Equity (ROAE) and Net Interest Margin (NIM) determinants were used to measure profitability. Bank-specific determinants such as, capitalization, asset quality, liquidity, management efficiency and bank size were regressed against profitability. In addition, macroeconomic variables such Market Capitalization of Listed Domestic Companies, Domestic Credit to Private Sector by Banks, General Government Expenditure, Money Supply were also included in the analysis. The result of this study shows that among all bank-specific determinants Management Efficiency has negative significant effect on all bank profitability determinants ROAA, ROAE and NIM in Turkey. Capital adequacy has negative significant effect on NIM and ROAA of participation and conventional banks, and positive significant effect on NIM of participation banks. There is negative robust effect of Asset Quality on ROAA of Participation banks and Conventional banks. Market capitalization has positive significant effect on ROAE of Participation banks and NIM of Conventional banks.