The impacts of conventional and Islamic banking sectors on real sector growth: Evidence from time-varying causality analysis for Turkiye

Advocates of Islamic finance claim that it contributes to the development of the real economy, rather than focusing on growth in financial assets by selling money to earn money, but no empirical evidence has been produced to support that view. Therefore, this study investigates the effects of conventional banking activities and Islamic banking activities, in particular in terms of their contribution to economic growth and development. The novelty of the study is that it treats these relationships in terms of time-varying causality supported by Fourier functions. The study also seeks evidence of the possibility that the effect of conventional and Islamic banking on the dependent variables might become U-shaped or inverted U-shaped over time. This study uses three different datasets on the real economy in Turkiye for the period January 2005 to February 2023. Our results reveal that loan volume in banking in general and Islamic banking in particular affects the sectors considered and that causality varies over time. The study shows that, in Turkiye, Islamic banking activities have a weaker impact than banking activities in general because Islamic banking is still in its early stages of development, but it still has an impact on related sectors. Copyright (c) 2023 Borsa Istanbul Anonim Sirketi. Published by Elsevier B.V.