Causal Link Between Islamic and Conventional Banking: Evidence from Turkish Banking Sector

This study aims to shed light on the risk structure in the presence of Islamic banking, in particular in Turkey. Islamic banking and conventional banking are considered to be different kind of sources for funding. Returns in the conventional banking expected to be heavily influenced by the interest rate in the money market. However, Islamic banking returns are interest-free so that interest rate changes are not expected to affect the deposit returns in Islamic banks. Interest rates in the economy is a proxy to highlight the general risk level of the economy. By looking at the causal relationship between the deposit returns of both Islamic banks and conventional banks, it is possible to address the different types of banking in the general risk structure of the economy. This is the first study to address the mentioned difference in banking sector in Turkish economy. This paper tries to identify the direction of causality between Islamic and conventional banking term deposit rates by mea