DO PARTICIPATION BANKS CONTRIBUTE TO ECONOMIC GROWTH? TIME-SERIES EVIDENCE FROM TURKEY

OpenAlex İngilizce

One of the most important goals of developing nations is to achieve rapid economic growth. There is a consensus in the literature of economics that a well-developed financial sector will accelerate economic growth. However, few studies have examined the link between participation banks and economic growth. To contribute to the literature, this study aims to analyze the relationship between participation banks and economic growth for the case of Turkey. To reach this purpose, we established a neoclassical growth model by employing gross domestic product, total credits given by participation banks, gross fixed capital formation and the number of employed persons using time series data covering the period of 2005Q4-2020Q2. We conducted a battery of unit root tests, co-integration, and causality tests. The results reveal that there is a long run stable relationship among the variables. As for the long-run estimators, a 1% increase in gross fixed capital formation, employment and credits given by participation banks will lead to 0.715%, 0.422% and 0.021% increase in economic growth in Turkey. These findings suggest that participation banks, as well as capital and labor, have a statistically significant impact on the economic growth of Turkey. The causality test results show that there is a one-way causal relationship from participation banks’ funds to economic growth both in the short and long run but not vice versa. Two important policy implications emerge from this study. Firstly, participation banks may play an essential role in bringing idle funds to the banking system in Turkey. Therefore, participation banks should be seen as complementary to conventional banks rather than a substitute. Secondly, participation banks should diversify their products by introducing new financial products and services to unleash their untapped potential.