THE EFFECT OF RETAIL CREDITS ON BANK PROFITABILITY: A COMPARATIVE EMPIRICAL ANALYSIS

Year 2018, Volume: 5 Issue: 1, 16 - 28, 15.02.2018

Yusuf Dinc

Abstract

Retail credits became an important instrument of banking
as of 1960s. The effect of retail credits, in which mortgage and consumer
credits have a great share, in the profitability of banks have not been
analyzed in detail so far. The main items of retail credits, like mortgage and
consumer credits, contribute greatly to the risk management of banks with their
characteristics like having regular cash flow in banks. Due to the structure of
the guarantee and mortgage credits, which provide low risk weight, it is important
to determine the capital needs of banks. However, due to relatively long maturity
structure, mortgage credits also feed the maturity mismatch risk, which is the
basic problem of banking system. Such credits, with which low costs are
provided in favor of the clients, play determinant roles in the profitability
of banks. Consumer credits, on the other hand, are provided to the clients in
shorter maturity periods and with costs that are in more favor of banks. In the
scope of this study, the effects of retail credits on conventional banks and
participation banks, which are active in Turkey, have been investigated over
mortgage and consumer credits. The findings of the study show that retail
credit types have strong negative effects on Net Interest Margin (NIM), which
has been selected as the profitability indicator for conventional banks in the
scope of the study. For Participation Banks, on the other hand, unlike conventional
banks, retail credit types have stronger and more positive influences on Net
Profit Share Margin (NPSM). The findings of the present study are important for
further studies that will be conducted on retail banking and for comparative
studies on performance assessments.

Keywords

retail credits, profitability, Islamic banking, comparison, participation, banking

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