The Effect of Loan Portfolio Concentration Level on Financial Stability and Performance: A Comparatıve Analysis in Dual Banking SystemOğuzhan Ece, Bülent Diclehan Çadırcı
In this study, the effect of loan portfolio concentration on financial stability and performance was investigated in both conventional and Islamic banking systems. In the study examining the period of 2005-January and 2021-December, the long and short-term effects of credit portfolio concentration on financial stability and performance in the bilateral banking system were analyzed by cointegration tests. According to the empirical results, in which ARDL method for the conventional banking system and fully modified ordinary least squares (FMOLS), dynamic ordinary least squares (DOLS) and canonical cointegrating regression (CCR) methods for the Islamic banking system were used, it has been found that the diversification of the loan portfolio reduces the bankruptcy risk in the conventional banking system in the long run and it has both positive and negative lagged effects in the short run. In the Islamic banking system, while there is no relationship between this diversification and financial stability in the long run, it has been concluded that it increases the risk of bankruptcy in the short run. When evaluated in terms of banking performance, it is seen that loan portfolio diversification does not cause a serious effect in the long or short term and does not cause differentiation within the bilateral banking system.
Kredi Portföy Yoğunlaşma Düzeyinin Finansal İstikrar ve Performans Üzerine Etkisi: İkili Bankacılık Sisteminde Karşılaştırmalı Bir AnalizOğuzhan Ece, Bülent Diclehan Çadırcı
Çalışmada kredi portföy yoğunlaşmasının hem konvansiyonel hem de İslami bankacılık sisteminde finansal istikrar ve performans üzerindeki etkisi araştırılmıştır. 2005–Ocak ile 2021-Aralık döneminin incelendiği çalışmada, kredi portföy yoğunlaşmasının ikili bankacılık sistemi içinde finansal istikrar ve performans üzerindeki uzun ve kısa vadeli etkileri eş bütünleşme testleri aracılığı ile analiz edilmiştir. Konvansiyonel bankacılık sistemi için gecikmesi dağıtılmış otoregresif sınır testi (ARDL), İslami bankacılık sistemi için tamamen geliştirilmiş en küçük kareler (FMOLS), dinamik en küçük kareler DOLS ve kanonik eşbütünleşme regresyonu (CCR) yöntemlerinin kullanıldığı çalışmanın ampirik sonuçlarına göre kredi portföy çeşitlendirilmesinin konvansiyonel bankacılık sisteminde uzun vadede iflas riskini azalttığı, kısa vadede hem pozitif hem de negatif gecikmeli etkilere sahip olduğu gözlemlenmiştir. İslami bankacılık sisteminde ise uzun dönemde bu çeşitlendirmenin finansal istikrar ile bir ilişkisine rastlanılmazken kısa vadede iflas riskini artırdığı sonucuna ulaşılmıştır. Bankacılık performansı açısından değerlendirildiğinde kredi portföy çeşitlendirilmesinin uzun ya da kısa vadede ciddi bir etkiye sebep olmadığı ve ikili bankacılık sistemi içerisinde farklılaşmaya yol açmadığı görülmektedir.
In this study, the short and long-term effects of the credit portfolio concentration level in the Turkish banking sector, where there is a dual banking system, are investigated on financial stability and performance in conventional and Islamic banking systems. In this context, two main research questions are examined in the study. These questions are as such:
· “Does the level of credit portfolio concentration have an impact on the financial stability of conventional and Islamic banks in Turkey and does it lead to differentiation?”
· “Does the level of credit portfolio concentration have an impact on the financial performance of conventional and Islamic banks in Turkey and does it lead to differentiation?”
The results of empirical studies on how loan portfolio concentration/diversification affects financial stability and performance in the dual banking system differ from country to country. It is thought that this situation is caused by structural conditions such as the functioning of the banking system, legal infrastructure, sectoral differences, and the level of development of the country and the market. As a result of the literature review, it has been concluded that it is not possible to make a generalization in terms of the relationship between financial stability and performance and loan portfolio concentration. However, in the study, the relevant literature was examined in depth and prominent current studies were evaluated.
In the study, the short-term and long-term effects of credit portfolio concentration on financial stability and performance in the dual banking system were investigated through cointegration tests. In the analysis made with monthly data for the period of January 2005 and December 2021, the Z score representing the risk of bankruptcy for financial stability and the return on assets ratio (ROA) for financial growth were used as dependent variables. In the models, credit portfolio concentration index, leverage ratio, bank size, liquidity coverage ratio and management quality are added to the models as independent variables.
According to the unit root test results of the variables, long and short-term effects in conventional banking system were analyzed with ARDL method and in Islamic banking with FMOLS, DOLS and CCR methods together with Johansen Cointegration Test.
According to the results of the analysis, although the credit portfolio concentration in the conventional banking system has a significant and negative relationship with the bankruptcy risk, which represents financial stability, in the long run, no effect of the concentration on financial performance was observed. Among the independent variables, only the liquidity coverage ratio affects positively to the bank performance. The short-term error correction coefficients of the models have significant values between 0 and -1. This indicates that short-term imbalances converge to the long-term equilibrium level over time. In addition, it has been observed that some of the short-term lagged values of the independent variables, especially the loan portfolio concentration index, have significant positive or negative effects.
In the Islamic banking system, there is no evidence that the credit portfolio concentration has any effect neither the financial stability nor financial performance in the long run. On the other hand, in the long run, it has been concluded that bankruptcy risk and ROA value is determined by the management quality, leverage ratio, liquidity coverage ratio and bank size. When short-term relationships are examined, vector error correction coefficients take significant values between 0 and -1, similar to conventional banking models. In addition, it has been found that although loan portfolio concentration has a positive effect on financial stability in the short term, it has no effect on financial performance.
In summary, it has been concluded that the loan portfolio concentration differs in terms of financial stability in the dual banking system in the long run, but does not differ in terms of financial performance. In the short run, negative effects in conventional banking and positive effects in Islamic banking at the same lag levels in terms of bankruptcy risk can be considered as an indicator of differentiation. From the perspective of financial performance, it is striking that credit concentration does not have a serious effect in the short run.