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

Posted: 14 Oct 2016

See all articles by Ahmet Aysan

Ahmet Aysan

Government of the Republic of Turkey - Central Bank of the Republic of Turkey

Mustafa Disli

Ghent University - Faculty of Economics and Business Administration

Meryem Duygun Fethi

University Leicester School of Management

Huseyin Ozturk

University of Leicester - School of Management

Date Written: October 13, 2016

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.

Keywords: Depositor discipline, Islamic banks

JEL Classification: G23, G28, O52

Suggested Citation

Aysan, Ahmet and Disli, Mustafa and Fethi, Meryem Duygun and Ozturk, Huseyin, Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework (October 13, 2016). Journal of Financial Services Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2851781

Ahmet Aysan

Government of the Republic of Turkey - Central Bank of the Republic of Turkey ( email )

Istiklal Cad. 10 Ulus
06100 Ankara, Ankara 06050
Turkey

Mustafa Disli (Contact Author)

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

Meryem Duygun Fethi

University Leicester School of Management ( email )

University Leicester
School of Management
Leicester, LE1 7RH
United Kingdom

HOME PAGE: http://www.le.ac.uk/ulsm/academics/mfethi.html

Huseyin Ozturk

University of Leicester - School of Management ( email )

Leicester
Leicester, AK LE1 4AY
United Kingdom

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