Conventional Banks Versus Islamic Banks: What Makes the Difference?

This paper investigates the determinants of banking profitability in the Turkish banking sector between 2003 and 2011. In addition, we calculate the effect of being an Islamic bank on banking profitability, which allows us to differentiate conventional and Islamic banks. We introduce the method of propensity score matching to the banking literature in order to estimate the average treatment effect (ATE) of being an Islamic bank in Turkey where there exists a dual banking system. The results show that in terms of return on asset (ROA) and return on equity (ROE), being an Islamic bank does not create any difference. However, being an Islamic bank turns out to have a significant and negative effect on net interest margin (NIM). These results have many policy implications in the Turkish banking industry where Islamic banks mimic others to be one of the leading examples. © Authors