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Integration of the Participation Banking Legislations to the Banking Law and its Influence on Competition

In some countries such as Turkey, Islamic banks and conventional banks coexist in banking industry. However, due to dissimilarities in their business models, these institutions may be subject to different statutory and regulatory arrangements. The arrangements in a dual banking system might repel potential customers from Islamic banks if privileged arrangements are solely open to conventional banks. Up until late 2005, Islamic banks in Turkey were recognized as “special finance houses” and were exempt from the rights that covered conventional banks, like deposit coverage. As an interesting case, the legislative changes in late 2005 have eliminated the deprivations and provided more constructive environment for Islamic banks. Yet, what these legislative changes have brought about for Islamic banks is still unexplored. In this paper, we study the effects of the legislative changes in Turkish Islamic banking on market structure. The results reveal that Islamic banks gained more market power after the enactment of various legislations and integration of these legislations to the Banking Law.