AGGREGATE LIQUIDITY CREATION OF ISLAMIC BANKS IN TURKEY

Abstract

This paper provides a detailed analysis of aggregate liquidity created by Islamic (participation) banks in Turkey. Using quarterly regulatory dataset for the period of 2010–2017 and applying Berger and Bouwman framework to measure liquidity creation, we document that the liquidity created by Turkish Islamic (participation) banks has tripled (in inflation adjusted terms) in our sample period. Furthermore, we find that Islamic banks have created liquidity both on and off their balance sheets. Finally, we observe that Turkish Islamic banks have been creating more liquidity with their liabilities than their assets. Despite the continuous upward trend in aggregate liquidity created by Turkish Islamic banks, their loan-to-asset and deposit-to-asset ratios have been declining in our sample period, which suggests that the observed trend has been driven by extensive margin (i.e., bank sizes growing in real terms) rather than the intensive margin (banks creating liquidity more effectively).