Financial Stability Of Islamic (Participation) Banks In Turkey

Transcription

1. Financial Stability of Islamic (Participation) Banks in Turkey(*) by SAKARYA, Burçhan bsakarya@gmail.com January 2016 Burçhan SAKARYA, Senior Banking Expert at Banking Regulation and Supervision Agency, ANKARA. The views expressed in this paper are those of the author’s and do not necessarily reflect those of the BRSA. (*) This paper is under peer review process of JEBPIR [Journal of Economics, Business, Politics, and International Relations] please cite accordingly.
2. Financial Stability of Islamic (Participation) Banks in Turkey Abstract Since Global Financial Crisis the performance of Islamic banks and conventional banks have been an area of interest due to the difference in the principles of financial intermediation. Another area of interest is the financial stability characteristic of Islamic banks stemming from their business model. With the strong growth projection of Islamic banking in global finance, their soundness becomes of an increasing concern. The main goal of the paper is to investigate whether Islamic (participation) banks in Turkey are more stable than conventional banks using a Z-Score values in a panel data framework. Keywords: Islamic Banks, Z-Score, Panel Data JEL classification: G20, G21, C33. 1. Introduction Global financial crisis had changed the view towards conventional banking model significantly. The build-up for the crisis have been mainly attributed to increasingly excessive leverage and use of highly complex financial instruments leading them to a stage where the term toxic is recognized. During this period, Islamic banks, which had weathered this turbulent time relatively sound and stable, gained attention both from bankers (i.e. banking industry investors in search for new business models) and policy makers as financial stability evolved as an explicit policy objective. Moreover, Islamic finance has experienced considerable growth over the last decade. The oil exporter economies surplus contributed to the increased international capital flows. Compliance criteria to Islamic Law (Sharia) induced the use of Islamic financial instruments and Islamic banking business in all geographies. In this environment where Islamic finance is becoming a major field of business in banking, their stance as sound and stable institutions contribute to their growth. In this study, the financial stability of Turkish Islamic banks is investigated in an attempt to fill the gap in empirical literature, while providing developments in global and Turkish Islamic banking market. The following section is about Islamic banking at a global perspective. A brief history of Islamic banking in financial markets is given here. The third section is a section on principles of Islamic banking. The differences in the principles of conventional and Islamic banking seeds the difference in stability. Hence the following section gives a discussion on this issue. The fifth section provides a survey on empirical studies on Islamic banks, given the theoretical framework. The sixth section is on Turkish 1
3. Islamic banking market presenting a concise history and recent figures . The following section is the empirical analysis and the last section is for concluding remarks. 2. Islamic Banking at Global Perspective While modern Islamic finance is growing within international finance, its history is quite recent. In its modern form, Islamic banking started with pioneering experiments in 1963 in Egypt. The MitGhamr Islamic Saving Associations (MGISA) mobilized the savings of Muslim investors, providing them with returns that did not transgress the laws of the Shari'ah (Hussain, Shahmoradi and Turk, 2015:4). Again in Egypt, Nasr Social Bank was established as an Islamic Bank by a state support. This was followed by Philippine’s Amanah Bank in 1973. After the launch of the 1st International Conference on Islamic Economics organized by King Abdul Aziz University in Saudi Arabia and the establishment of the first commercial Islamic bank, Dubai Islamic Bank (DIB) in the United Arab Emirates in 1975, the Islamic banking industry started to gain momentum (Iqbal and Molyneux, 2005). Another significant event should be noted as the establishment of The Islamic Development Bank as a multilateral development bank to “foster the economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of Islamic Law” (IDB; 2015). Thus following these initiatives many private and semi-private commercial Islamic banks were established especially in Egypt, Sudan, Kuwait, Bahrain, and Malaysia. Table 1: Breakdown of Islamic Finance Segments by Region (USD billion, 2014) Banking Assets Sukuk Outstanding Islamic Funds Assets Takāful Contributions Asia 203.8 188.4 23.2 3.9 Gulf Cooperation Council (GCC) 564.2 95.5 33.5 9.0 MENA (excl. GCC) 633.7 0.1 0.3 7.7 Sub-Saharan Africa 20.1 1.3 1.8 0.6 Others 54.4 9.4 17.0 0.3 1,476.2 294.7 75.8 21.4 Region Total Source: IFSB (2015) Currently, according to Islamic Financial Services Board (IFSB) a total of 16 countries host Islamic financial services. These countries are Afghanistan, Bahrain, Bangladesh, Brunei Darussalam, Egypt, Indonesia, Iran, Jordan, Kuwait, Malaysia, Nigeria, Oman, Pakistan, Saudi Arabia, Sudan and Turkey. As of 2014, total asset size of global Islamic banking is about 1.48 trillion USD. According to the data compiled by Hussain, Shahmoradi and Turk (2015), the total asset size of Islamic finance (comprising banking and non-banking financial institutions) displayed a significant growth since mid- 2
4. 2000 ’s and rose from around 400 billion USD in 2006 to almost 1.9 trillion USD by 2014. From this data we can see that Islamic finance is mainly bank based. Investigating IFSB’S data, it is seen that almost 81%of the banking industry concentrated in the Middle East North and America (MENA) and Gulf Cooperation Council (GCC) countries. Moreover ISFB (2015) reports that Iran’s banking industry dominates global Islamic banking assets with a share of around 40%, where the whole banking system is fully Islamic. Figure 1: Shares of Global Islamic Banking Assets (as of July 2014) Egypt, 1.17 Sudan , 1.00 Pakistan, 0.75 Brunei, 0.43 Bangladesh, 1.34 UK, 0.43 Indonesia, 1.39 Jordan, 0.49 Others, 1.99 Bahrain, 1.67 Turkey, 3.20 Qatar, 4.47 Iran, 40.21 Kuwait, 5.97 UAE, 7.36 Malaysia, 9.56 Saudi Arabia, 18.57 Source: IFSB (2015) However, while Iran and Saudi Arabia dominates the global Islamic banking industry, a significant acceleration is observed in countries outside the MENA region in countries. Hussain, Shahmoradi and Turk (2015) points out that “..with more Muslim populations, but most of the industry’s growth in the MENA region was led by GCC countries. In particular, the Islamic finance industry grew, on average, by 43 percent in Indonesia, and by 19 percent in Turkey during 2009–13”. This fact may be attributed to the increased commodity prices helping GCC countries to get more financially involved with other Muslim economies. But also another factor may be the global crisis environment paving a way for a relatively stable and sound bank business model. 3
5. Looking at several structural indicators (complied by IFSB from data providing 15 countries), it can be seen that the total number of Islamic banks and Islamic banking windows have reached to 242 institutions, operating with 32,354 branches. This indicates a significant increase considering the aforementioned recent history. In parallel, total number of personnel is reported as around 510 thousand. Table 2: Selected Aggregated Islamic Financial Indicators Indicators Currency Unit 2013 2014 Total assets USD Billion 1,200 1,308 Total Sharī`ah-compliant financing USD Billion 651 688 Total funding/liabilities USD Billion 962 1,084 238 242 32,096 32,354 504,098 513,059 Number of Islamic banks and Islamic banking windows Number of domestic branch offices Number of employees Source: PSIFIs countrywise data. Note: The aggregated data for total assets (15 countries), total Sharī`ah-compliant financing (15 countries), total funding/liabilities (14 countries), and total revenues (13 countries) are calculated from available countrywide structural data from Islamic banks and Islamic banking windows of conventional banks, converting into U.S dollar terms, at the end period exchange rates., While Islamic banking showed a strong global growth performance, compared to conventional commercial banking, it still remains considerably small. The total asset size of the global Islamic banking can only match to the total asset size of a single bank, namely ING Bank, ranking as 21st on the biggest global banks. Hence, financial industry’s current structure indicates a tough competition for Islamic banking services. But on the other hand, International Organization of Securities Commissions predicts that as much as half of the savings of 1.2-1.6 billion Muslims would be directed to Islamic financial institutions by 2015 (Imam and Kpodar, 2010). 3. Principles of Islamic Banking One major reason attributed to the stability of Islamic banking compared to conventional banking business is the “nature” of Islamic banking, which differs from conventional banking. To have an overall understanding of this differentiated “nature”, the key principles of Islamic finance and banking needs to be discussed. As a definition “Islamic finance and/or banking” refers to relatively broad and geographically diverse field. Fundamentally it refers to a process of financial transactions, from beginning to end, which complies with Islamic law, Shari’ah legal code, and basically transactions of interest free nature. This broad definition causes a diversified implementation between regions, countries etc.. While Islamic banking refers to managing a financial process according to/in line with Islamic rules, the differentiation 4
6. from conventional banking reveals itself from another point . Hasan and Dridi (2010) points out the fundamental difference in the field of risk transfer and risk sharing. The financial intermediation function, which is based on assets, in Islamic banking is based on risk sharing/participation. In conventional banking the financial intermediation is generated from debt based activities and risk transfer. This issue must be underlined as the great divide. Moreover, restrictions on speculative transaction due to Islamic rules, limit the complexity and variety of financial instruments. These features already bring Islamic banking to a more stable and sound line of business (there is a question of loss of efficiency in terms of economies of scope and scale stemming from this divide for more on this discussion on global see Beck, Demirgüc-Kunt, and Merrouche (2010), for Turkish case see Sakarya and Kaya (2013)) Table 3: Risk Sharing in Islamic Banking and Risk Transfer in Conventional Banking Risk Sharing in Islamic Banking Risk Transfer in conventional (Commercial) Banking Sources of funds: Investors (profit sharing Sources of funds: Depositors transfer the risk to the investment account (PSIA) holders) share the risk conventional banks, which guarantee a pre- and return with Islamic Banks. The return on PSIA specified return. is not guaranteed and depends on the banks’ performance. Uses of funds: Islamic Banks share the risk in Uses of funds: Borrowers are required to pay Mudharabah Musharakah interest independent of the return on their project. (Müşaraka) contracts and conduct sales contracts in Conventional Banks transfer the risk through most other contracts. securitization or credit default swaps. Financing is (mudaraba) and debt-based. Source: Hasan and Dridi (2010) Chong and Liu. (2009) considers both type of financial intermediary institutions (Islamic and conventional) ultimately as profit maximizing firms, thus having many common traits. These intermediaries reduce information asymmetries, increase efficiency in resource allocation, decrease transaction costs and assist diversifying small savers and investors. That’s how they should be analyzed. Hence through this lens, the similarities yield that these two financial intermediation models are compatible. The main reason for that is the market competition drives profit maximizing firms to conduct in similar ways in the line of financial intermediation. According to Chong and Liu. (2009), that’s why the convergence of profit loss sharing (PLS) rates and interest rates are observed. 5
7. However pricing might not be the crucial parameter . Considering a stylized Islamic bank balance sheet a difference in bank business model can be seen. In Islamic banking business one major instrument is mudârabah. Muḍârabah is a partnership contract between the capital provider (Rabb-Al-Mal) and an entrepreneur (Muḍârib) whereby the capital provider would contribute capital to an enterprise or activity that is to be managed by the entrepreneur. Profits generated by that enterprise or activity are shared in accordance with the percentage specified in the contract, while losses are to be borne solely by the capital provider unless the losses are due to the entrepreneur’s misconduct, negligence or breach of contracted terms ( IFSB, 2015:). Hence in mudârabah, a bail-in system is place by definition. Table 4: Stylized Islamic Bank Balance Sheet Assets Liabilities Demand deposits (qard al hasan, wakala) Cash and liquid securities Interbank murâbaḥah Interbank murâbaḥah Unrestricted profit sharing investment accounts (mudârabah) Inventory (real estate, automobiles, commodities, etc.) Asset-backed transactions (murâbaḥah, ijārah,salam, and istisna) Restricted profit-sharing investment accounts (mudârabah) 1/ PLS transactions (mudârabah, musharakah ) Reserves (PER, IRR) Fee-based services (wakalah, kafalah) 2/ Shareholders’ equity capital Source: Hussain, Shahmoradi, and Turk (2015) 1/ Restricted profit sharing investment accounts are generally included off-balance sheet. 2/ Fee-based services include letters of credit, letters of guarantee, safekeeping of negotiable instruments and the collection of payments, internal and external transfer operations, hiring coffers, administration of real estate or projects, and administration of wills. Most of them are generally included off-balance sheet. 4. Islamic Banking and Financial Stability The (stylized) Islamic bank balance sheet and the nature of financial intermediation based on risk participation makes a strong case for financial stability. Financial stability has many definitions to it. It is a broad concept, encompassing the different aspects of finance (and the financial system)— infrastructure, institutions and market, as Schinasi (2004:06) points out. Thus financial stability depends 6
8. on several factors . And one major factor can be defined as the micro prudential factor. Micro prudential perspective is such a perspective that even without the notion systemic risk (or macro prudential perspective), it remains as an objective. So, basically, maintaining financial soundness of individual financial institutions serves both micro prudential and macro prudential goals in post global crisis understanding of financial stability. Islamic banking provides a relatively simple and straight forward model which facilitates micro prudentiality that fosters financial stability. Risk participation model in financial intermediation is one component. The interest free financial instruments induce a less leveraged, equity based financial intermediation. Shaping a relatively equity weighted liability structure Another factor is that Islamic rules dictate relatively less-complex financial instruments. This keeps Islamic financial institutions less complex, less interconnected and smaller for that matter. Thus with all these qualities Islamic financial institutions (banks) make half way through solving the SIFI1 issue. At least Islamic banks seems to be already in line with recent global structural reform initiatives such as Volcker Rule, Liakanen Report and Vickers Proposal, which basically separates (or ring fences) investment banking activities and deposit banking activities to support soundness, ease the resolution process and limit costs of probable bank failures on public. While these main factors contribute soundness/resilience of Islamic banks, and to the (micro) prudential aspect of financial stability for that matter, there are also several drawbacks of risk sharing. Čihák and Hesse (2008) indicates that “..the PLS financing shifts the direct credit risk from banks to their investment depositors, but it also increases the overall degree of risk on the asset side of banks’ balance sheets, as it makes Islamic banks vulnerable to risks normally borne by equity investors rather than holders of debt.” Hence the pricing of risk in Islamic banking becomes a question. The connection between participation and collateralization becomes an issue. For example in mudârabah, the bank provides the capital needed for financing a given project. The entrepreneur offers labor and expertise. The PLS of the project is shared SIFIs (Systemically Important Financial Institutions) are financial institutions whose distress or disorderly failure, because of their size, complexity, systemic interconnectedness and substitutability, would cause significant disruption to the wider financial system and economic activity (see FSB, 2011). 1 7
9. between the bank and the entrepreneur at a decided ratio . So the financial losses are taken by the bank. The liability of the entrepreneur is his labor and time. This type of risk sharing may also incentivize moral hazard. Another specific risk inherent in Islamic banks stems from the special nature of investment deposits, whose capital value and rate of return are not guaranteed. Some of the authors quoted above argue that this increases the potential for moral hazard, and creates an incentive for risk taking and for operating financial institutions without adequate capital Another area is the limited use of hedging instruments as Islamic rule may forbid use of these, therefore management of market risks may come at higher costs (direct and/or indirect) . Moreover in some cases absence of such tools may increase vulnerabilities. Overall, Islamic banking model provides a relatively direct financial intermediation with risk sharing at its core. The limitations borne by Islamic rules imply a simple yet more equity based (less leveraged) banking business. Thus, this model is praised as it excludes the culprits of Global Crisis. 5. Empirical Studies on Islamic Banks The theoretical proposition of equity based intermediation of financing to real activities being intrinsically more stable have been an issue for empirical studies as well. Especially following the Global Crisis this theoretical proposition was somewhat supported by mere observation, as the contagion of the Global Crisis was limited to world of Islamic finance. Moreover with the increase in the interest on Islamic finance stemming from an increased overall awareness, the strong accumulation of wealth in Islamic countries, increased demand to Islamic finance products and increase in financial instruments, draw considerable attention to Islamic banking and its empirical investigation. The empirical studies on bank soundness are carried out through two major veins. The first one is the performance. Bank performance analysis is critical in maintaining a sound business. Weaknesses in performance and efficiency for that matter are likely to lead instabilities. Haron (1996), Bashir (2000) 8
10. and Beck , Demirguç-Kunt and Meriouche (2013) may be cited for investigating performance and efficiency in international cases and Parlakkaya and Çürük (2011) and Sakarya and Kaya (2013) may be cited for a recent analysis for Turkish banking system. While regional or international studies are usually based on peer group analysis considering Islamic banking and conventional banking models as distinctive peers. Local market studies such as Sakarya and Kaya (2013) are more granular, bank based studies. Demirgul-Kunt and Meriouche (2013) find that Islamic banks are more cost-effective in a general sense, but in markets where both Islamic and conventional banks exist, conventional banks are more cost-effective due to diversification. Sakarya and Kaya (2013) concludes that, while Islamic banks operate with higher share of equity, and focus more on traditional function of financial intermediation, they do not display any difference in efficiency and profitability (performance), The second vein of empirical research on Islamic banks is the Z-score and GARCH models. These type of studies the z-score has become a popular measure of bank soundness (Beck, Demirgüç-Kunt and Merrouche, 2013; Čihák and Hesse, 2008). While Z-score used in Demirgüç-Kunt and Meriouche (2013) differ from others that apart from stability different business models are also investigated by using balance sheet data are from Bankscope , on a yearly based sample covering 1995-2007, fovcusing on pre-crisis period and structure . Čihák and Hesse (2008) investigates the financial stability of Islamic and conventional banks. All relevant were again collected data from bank-scope database. The study covers 77 Islamic banks and 397 conventional banks over a period of 1993 to 2004. Once more a pre-crisis period. These two major studies have inspired many domestic market analysis. Rahim and Zakaria (2013) employed z-score model to find out whether Islamic banks were less or more stable than conventional banks for Malaysia. Rahji and Hassari (2013) also employ z-score analysis to compare Islamic banking between MENA and Southeast Asia region. Gamaginta and Rokhim (2015) provide an analysis for Indonesia. Ghassan and Fachin (2015) investigates Saudi Arabia and Pradhan (2014) analyzes India for financial stability. 9
11. Such domestic banking sector analysis add significant value to the higher understanding of this issue . First off the data quality is considerably higher. More granular, and hand on data provides more reliable results and inference. Second, the control variables are going to be symmetric for all individual banks. Moreover, Islamic banking stability is also a parameter for financial market stability. Higher the share of Islamic banking it is expected to affect overall market soundness. As seen on ISFB (2015) data, the share of Islamic finance in a given economy varies. Thus this would create causality issues when dealt with broader scoped international analysis. Naturally regional or international studies contribute in a different perspective. Thus in this study Turkish banking sector is studied in a bank based, z-score model to investigate financial stability of Islamic banks. 6. Islamic Finance in Turkey Islamic finance which has more than 40 years of international history, has a 30 years of background in Turkey. Islamic finance in Turkey dates back to 1983 with the establishment of “special finance institutions” by the Decree of Ministry of Councils numbered (83/7506). Later of these institutions have been defined as “Participation banks” with an amendment to the new Banking Act Nr. 5411 in 2005. These institutions are described as institutions that are licensed to provide all banking services according to Islamic finance principles. Figure 2: Share of Participation (Islamic) Banks in Turkish Banking System 6.0 5.5 5.0 5.2 5.1 (%) Share in Total Assets :Participation 4.0 (Islamic) Banks / Total Sector 4.0 3.3 3.0 4.6 4.3 3.5 2.8 2.3 2.1 2.0 1.8 2.4 2.0 1.1 1.0 Source: BRSA, PBAT(TKBB) 10 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 0.0
12. The total assets of Islamic banks in Turkey showed a remarkable growth performance especially during the post 2000-2001 Turkish financial crisis period . During 2002-2014 period average annual growth rate of the asset size for these banks is almost 29% where the overall banking sector’s is 18.5%. However, even with this exceptional growth the share of Islamic banks in Turkish banking system has reached at 5.2% by the year end 2014. The share of participation funds in total deposits of the sector is higher compared to the share in assets. This is simply attributable to the fact that as a significant saving unit of the Turkish economy system, households with relatively higher religious concerns, tend to direct their savings to Islamic banks, while (private) corporate sector seeks loans from every possible source. Figure 3: Share of Islamic Banks’ Participation Funds in Total Deposits 7.0 6.0 Share in Deposit (Participation Funds): Participation (Islamic) Banks / Total Sector (%) 5.2 5.0 4.2 4.0 3.3 3.0 6.2 5.4 6.5 6.2 5.6 4.2 3.6 3.0 2.7 2.2 2.0 2.5 1.3 1.0 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 0.0 Source: BRSA, PBAT(TKBB) Hence looking at participation banks’ share in loans in Turkey, an abrupt shift is observed during 2002-2003 period. From this period onward, the increase in this market share displays somewhat a relatively horizontal progress. This is mainly due to the increased financial deepening in Turkey, following the Turkish banking restructuring program and attained economic and political stability. These factors boosted retail banking by 2003, increasing household and corporate debt. 11
13. Nevertheless looking at Islamic banks share in loans and participation funds (deposits) one can easily observe that they are both around 6% (despite a drop in the share of loans in 2014) and higher than their share in total assets. This may be evaluated as an indication of Islamic banks focus on traditional financial intermediation. Figure 4: Share of Islamic Banks’ Loans in Total Loans 7.0 6.0 Share in Loans: Participation (Islamic) Banks / 6.0 5.9 Total Sector (%) 5.2 5.0 4.9 4.6 4.0 3.8 4.2 4.1 6.0 5.6 5.9 5.2 4.8 4.3 3.0 2.0 1.8 1.0 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 0.0 Source: BRSA, PBAT(TKBB) The increased interest towards Islamic finance at global scale is also valid for Turkish case. Moreover Turkish Islamic banking is being cited for its favorable financial environment as well as political support in supporting the development of Islamic finance domestically (see Standard&Poors, 2015, Kammer et.al, 2015 and IFSB; 2015). As mentioned above, Islamic banking in Turkey grew with a stronger pace in an ever growing industry despite the global financial crisis since 2002. A significant differentiation can be observed in the average annual growth rate of total assets and deposits (participation funds), while lending is exceptionally robust in both Islamic and conventional, deposit banks. 12
14. Table 5 : Loans, Deposits and Total Assets of Islamic Banks and Deposit Banks Year Sector 2003 17.4 2004 22.7 2005 32.8 2006 22.8 2007 16.4 2008 26.0 2009 13.9 2010 20.7 2011 21.0 2012 12.6 2013 26.4 2014 15.1 2002-2014 Avg. 20.5 Source: BRSA, PBAT(TKBB) Total Assets Deposit Participation Banks Banks 12.6 32.9 23.0 45.4 27.2 10.0 22.0 38.3 15.4 41.4 27.3 32.5 12.0 30.5 19.7 28.9 12.4 29.6 10.4 25.2 22.1 36.7 11.6 8.6 20.0 29.5 Sector 35.2 50.0 57.4 40.0 30.4 28.6 6.9 33.9 29.9 16.4 31.8 18.5 30.9 Total Loans Deposit Participation Banks Banks 37.0 46.8 53.4 64.1 53.1 43.2 40.6 44.0 29.7 50.9 28.8 25.4 5.1 34.0 34.8 30.4 29.7 25.0 15.3 24.5 31.2 29.3 19.1 3.3 30.8 34.2 Total Deposits (Part. Funds) Deposit Participation Sector Banks Banks 12.6 12.6 27.4 23.0 23.0 45.7 31.6 27.2 48.5 22.3 22.0 33.2 16.0 15.4 33.0 27.4 27.3 28.4 13.2 12.0 40.3 19.9 19.7 23.9 12.7 12.4 18.5 11.0 10.4 22.2 22.5 22.1 27.9 11.3 11.6 6.4 18.5 17.8 29.1 While Islamic banks in Turkey outpaced deposits banks in terms of growth rates, their stability and profitability measures displayed somewhat a parallel development with the industry. This is mainly attributed to the fact that domestic economic and financial climate where deposits banks have also switched to traditional financial intermediation function, and the fact that Islamic banks are less leveraged. Moreover deposit banks have also utilized other sources of income generation with the availability of a wider range of (interest based) financial instruments. Table 6: Selected Financial Stability Ratios of Islamic Banks and Deposit Banks Capital Adequacy Ratio Deposit Participation Sector Banks Banks 2003 25.1 22.9 N/A 2004 30.9 28.2 N/A 2005 28.2 26.2 12.0 2006 23.7 21.6 12.5 2007 21.9 19.9 16.5 2008 18.9 17.4 16.1 2009 18.0 16.5 15.2 2010 20.6 19.3 15.3 2011 19.0 17.7 15.1 2012 16.6 15.5 14.0 2013 17.9 17.2 13.9 2014 15.3 14.6 14.0 Source: BRSA Year Return on Assets Deposit Participation Sector Banks Banks 16.4 14.4 N/A 2.5 2.4 N/A 2.4 2.3 N/A 1.7 1.5 3.5 2.6 2.5 3.3 2.8 2.7 3.1 2.0 1.9 2.8 2.6 2.6 2.4 2.5 2.5 2.0 1.7 1.7 1.6 1.8 1.8 1.5 1.6 1.6 1.3 13 Return on Equity Deposit Participation Sector Banks Banks 135.6 129.0 N/A 18.1 19.0 N/A 15.8 16.9 N/A 12.1 11.8 36.9 21.0 22.2 30.8 24.8 26.6 30.7 18.7 19.9 24.1 22.9 25.2 19.0 20.1 22.2 16.9 15.5 16.8 14.8 15.7 16.8 14.7 14.2 15.1 13.8
15. Hence , the return on assets and return on equity ratios of Islamic banks are around 1.3% and 13.8%, respectively in 2014. These figures are 1.6% and 15.1% for the deposit banks. Looking at the above table its seen that during 2006-2009 period Islamic banks profitability ratios are higher than those of deposit banks. Both type of banks have enjoyed significantly high profitability figures since restructuring period. As 2012, the profitability figures of Turkish banking industry had a minor setback, due to the domestic policy changes as well as global factors. However the recent figures are still exceptionally competitive in global sense. Same may be told for the capital adequacy ratios (CAR) of Turkish Islamic banks. The amendments in the regulatory framework induced a higher CAR for Islamic banks by 2006. Hence their CAR remains substantially higher than international standards as well as domestic requirements (14% as of 2014). Table 6: Selected Financial Stability Ratios of Islamic Banks and Deposit Banks Net FX Positon/Own Funds Deposit Participation Sector Banks Banks 2003 N/A N/A N/A 2004 0.5 0.3 -25.7 2005 -0.2 -0.4 2.2 2006 -0.2 -0.5 4.8 2007 0.3 0.3 -4.1 2008 0.3 0.1 4.7 2009 -0.1 -0.4 4.2 2010 0.5 0.6 1.1 2011 0.1 0.0 0.6 2012 0.4 0.4 0.6 2013 2.0 2.3 0.5 2014 -0.6 -0.6 -0.3 Source: BRSA Year Non-Performing Loans/Total Loans Deposit Participation Sector Banks Banks 17.5 18.6 N/A 11.5 12.1 N/A 6.0 6.2 N/A 4.7 4.9 4.1 3.7 3.8 3.5 3.5 3.6 3.4 3.7 3.7 4.4 5.3 5.4 4.7 3.7 3.7 3.5 2.7 2.7 3.1 2.9 2.9 3.0 2.7 2.8 3.4 Sector N/A N/A N/A N/A N/A 168.5 166.9 169.5 165.1 151.8 157.1 146.5 Liquidity Ratio Deposit Participation Banks Banks N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 167.1 238.9 165.3 215.3 167.9 232.4 162.6 238.3 150.1 204.7 155.8 194.9 145.5 174.3 One other notable issue is that Islamic banks’ loan loss ratio (non-performing loans/total loans) is a notch higher than the sectoral average. This is once again an expected result in focusing on financial intermediation. 14
16. 7. Data and Analysis An important feature of the z-score is that it is a fairly objective measure of soundness across different groups of financial institutions. It is an objective measure because it focuses on the risk of insolvency, i.e., on the risk that a bank (whether commercial, Islamic, or other) runs out of capital and reserves. The z-score applies equally to banks that use a high risk/high return strategy and those that use a low risk/row return strategy, provided that those strategies lead to the same risk-adjusted returns. If an institution “chooses” to have lower risk-adjusted returns, it can still have the same or higher zscore if it has a higher capitalization. In this sense, the z-score provides an objective measure of soundness.(Čihák and Hesse; 2008) The definition of Z-score is as follows:
17. Diversification Ratio (INCDIV) is defined as 1 − [