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Does Islamic banking offer a natural hedge for business cycles? Evidence from a dual banking system

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  • Aysan, Ahmet F.
  • Ozturk, Huseyin

Abstract

We examine the lending patterns in the Turkish Islamic banking over business cycles. We find that, similar to conventional banks, Islamic banks in Turkey exhibit procyclical lending pattern. We also find that Islamic bank lending does not show significant difference from conventional bank lending. The results conflict with some of the findings that indicate Islamic banks as natural stabilizers in the banking systems. We emphasize that regulatory amendments of the last decade that are effective on Islamic banks could induce these banks to lend procyclically. To test the validity of this conjecture, we empirically examine how the state of competition in the Turkish banking system affects bank lending across business cycles by disentangling the effects separately for Islamic and conventional banks. The results suggest that the degree of competition spur bank lending procyclicality at the same magnitude, confirming the convergence between Islamic and conventional banks in their lending patterns. We also discuss several other issues in Islamic banking which may lead to the procyclicality of lending.

Suggested Citation

  • Aysan, Ahmet F. & Ozturk, Huseyin, 2018. "Does Islamic banking offer a natural hedge for business cycles? Evidence from a dual banking system," Journal of Financial Stability, Elsevier, vol. 36(C), pages 22-38.
  • Handle: RePEc:eee:finsta:v:36:y:2018:i:c:p:22-38
    DOI: 10.1016/j.jfs.2018.02.005
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    5. Laurent Weill & Alexandra Zins, 2021. "Is Islamic Banking More Procyclical? Cross-Country Evidence," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(2), pages 318-335, June.
    6. Albaity, Mohamed & Noman, Abu Hanifa Md. & Saadaoui Mallek, Ray & Al-Shboul, Mohammad, 2022. "Cyclicality of bank credit growth: Conventional vs Islamic banks in the GCC," Economic Systems, Elsevier, vol. 46(1).
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