Who Responds More to Monetary Policy? Conventional Banks or Participation Banks

By Macit, Fatih | European Research Studies, April 2012 | Go to article overview

Who Responds More to Monetary Policy? Conventional Banks or Participation Banks


Macit, Fatih, European Research Studies


1. Introduction

The lending channel of monetary policy has been a topic of research for many economists and policymakers. The general wisdom is that when the central bank adopts a monetary policy tightening by raising the interest rates, this leads to a rise in the funding costs of banks and therefore a reduction in loan growth. The studies reveal that lending channel of monetary policy works for many economis but the reaction of banks to changes in monetary policy is not uniform and depends on various factors. In this regard bank fundamentals have a significant impact on the lending channel of monetary policy. Peek and Rosengren (1995) find that bank capitalization measured by the ratio of capital to total assets, affects the reaction of banks to monetary policy. Kishan and Opiela (2000) investigate lending channel of monetary policy for U.S. banks from 1980 to 1995 and they find that small banks and undercapitalized banks are more affected by monetary policy. Kashyap and Stein (2000) also analyze the monetary transmission mechanism for U.S. banks and find that the lending channel of monetary policy has larger impact on banks with lower ratios of cash and securities to assets.

The studies also reveal that bank ownership and the level of competition in the market also affect the lending channel of monetary policy. Macit (2012) studies the Turkish banking sector from 2006 to 2010 and investigates whether the ownership structure of banks affects their response to monetary policy. He finds that public banks show the smallest reaction to monetary policy, whereas foreign banks are the most responsive banks. (2) Bhaumik, Dang and Kutan (2011) analyze the implications of bank ownership for lending channel of monetary policy for Indian banking sector. They find that bank ownership has significant impact on the reactions of banks to monetary policy. Olivero, Li and Jeon (2011) investigate the impact of level of competition in banking sector on the lending channel of monetary policy by looking at the data for commercial banks in 10 Asian and 10 Latin American countries from 1996 to 2006. They find that the lending channel of monetary policy is weakened as the level of competition increases.

The contribution of this paper to existing literature is that it investigates the lending channel of monetary policy for Turkish banking sector and analyze whether banks' reactions to monetary policy change depending on their type. In particular, I investigate whether there is a systematic difference in the response of commercial banks and participation banks to changes in monetary policy. In Turkish banking sector there are three types of banks, namely commercial banks, participation banks, and investment and development banks. (3) Table 1 shows the number of banks and total asset size for each type by the end of the third quarter of 2011. In Turkish banking sector commercial banks significantly dominate the sector and they hold about 92.5% of the total assets in Turkish banking sector. Participation banks operate according to Islamic rules in their lending and deposit collection activities and they own about 4.4% of total assets in the sector. As opposed to commercial banks they do not promise a fixed interest payment to their depositors. Instead, the funds that are collected from depositors are utilized in trade and industry and the profit that is obtained from the lending pool is shared by the depositors. The name "participation banks" also stems from the fact that the depositors participate in profit or loss that results from the activities of the bank. As can be seen in Figure 1 and Figure 2, even though these banks occupy a small place in the sector, their rapid growth rate implies an important future potential for these banks.

[FIGURE 1 OMITTED]

[FIGURE 2 OMITTED]

In order to investigate whether there is a difference in the reactions of commercial banks and participation banks to changes in monetary policy I look at the quarterly loan growth of these banks and see how it is affected from a change in monetary policy instrument.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Who Responds More to Monetary Policy? Conventional Banks or Participation Banks
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.