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Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework

Author

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  • Ahmet F. Aysan

    (Central Bank of the Republic of Turkey)

  • Mustafa Disli

    (Ghent University)

  • Meryem Duygun

    (Nottingham University Business School)

  • Huseyin Ozturk

    (Central Bank of the Republic of Turkey)

Abstract

Although it has been intensively claimed that Islamic banks are subject to more market discipline, the empirical literature is surprisingly mute on this topic. To fill this gap and to verify the conjecture that Islamic bank depositors are indeed able to monitor and discipline their banks, we use Turkey as a test setting. The theory of market discipline predicts that when excessive risk taking occurs, depositors will ask higher returns on their deposits or withdraw their funds. We look at the effect of the deposit insurance reform in which the dual deposit insurance was revised and all banks were put under the same deposit insurance company in December 2005. This gives us a natural experiment in which the effect of the reform can be compared for the treatment group (i.e., Islamic banks) and control group (i.e., conventional banks). We find that the deposit insurance reform has increased the market discipline in the Turkish Islamic banking sector. This reform may have upset the sensitivities of the religiously inspired depositors, and perhaps more importantly it might have terminated the existing mutual supervision and support among Islamic banks.

Suggested Citation

  • Ahmet F. Aysan & Mustafa Disli & Meryem Duygun & Huseyin Ozturk, 2017. "Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(2), pages 257-282, April.
  • Handle: RePEc:kap:jfsres:v:51:y:2017:i:2:d:10.1007_s10693-016-0248-z
    DOI: 10.1007/s10693-016-0248-z
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    Cited by:

    1. Aysan, Ahmet Faruk & Disli, Mustafa, 2019. "Small business lending and credit risk: Granger causality evidence," Economic Modelling, Elsevier, vol. 83(C), pages 245-255.
    2. Kaouther Toumi & Jean-Laurent Viviani & Zeinab Chayeh, 2019. "Measurement of the displaced commercial risk in Islamic Banks," Post-Print halshs-01806496, HAL.
    3. Ahmet F. Aysan & Mustafa Disli & Huseyin Ozturk, 2018. "Bank lending channel in a dual banking system: Why are Islamic banks so responsive?," The World Economy, Wiley Blackwell, vol. 41(3), pages 674-698, March.
    4. Aysan, Ahmet F. & Disli, Mustafa & Duygun, Meryem & Ozturk, Huseyin, 2018. "Religiosity versus rationality: Depositor behavior in Islamic and conventional banks," Journal of Comparative Economics, Elsevier, vol. 46(1), pages 1-19.
    5. Meslier, Céline & Risfandy, Tastaftiyan & Tarazi, Amine, 2017. "Dual market competition and deposit rate setting in Islamic and conventional banks," Economic Modelling, Elsevier, vol. 63(C), pages 318-333.
    6. Marília Pinheiro Ohlson & Gerlando Augusto Sampaio Franco de Lima & Tony Takeda, 2021. "Deposit insurance and brokerage firms: impacts on the market discipline of the Brazilian banking industry," Working Papers Series 542, Central Bank of Brazil, Research Department.
    7. M. Shahid Ebrahim & Philip Molyneux & Steven Ongena, 2017. "Finance and Development in Muslim Economies," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(2), pages 165-167, April.

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    More about this item

    Keywords

    Depositor discipline; Islamic banks;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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