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Islamic Banks, Deposit Insurance Reform, And Market Discipline: Evidence From A Natural Framework

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  • Ahmet F. Aysan
  • Mustafa Disli

    ()

  • Meryem Duygun
  • Huseyin Ozturk

Abstract

Although it has been intensively claimed that Islam ic banks are more subject to market discipline, the empirical literature is surprisingly mute on th is topic. To fill this gap and to verify the conjec ture that Islamic bank depositors are indeed able to mon itor 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 deposit s or withdraw their funds. We look at the effect of the deposit insurance reform in which the dual d eposit insurance was revised and all banks were put under the same deposit insurance company in Dec ember 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 market discipline in the Turkish Islamic banking sector. This reform may have upset the sensitivities of the religiously inspired depositor s, and perhaps more importantly it might have terminated the existing mutual supervision and supp ort 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," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 17/929, Ghent University, Faculty of Economics and Business Administration.
  • Handle: RePEc:rug:rugwps:17/929
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    1. repec:eee:jcecon:v:46:y:2018:i:1:p:1-19 is not listed on IDEAS
    2. repec:bla:worlde:v:41:y:2018:i:3:p:674-698 is not listed on IDEAS
    3. repec:kap:jfsres:v:51:y:2017:i:2:d:10.1007_s10693-017-0273-6 is not listed on IDEAS
    4. 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.
    5. 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.
    6. 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.

    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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