Empirical Reflections of the Nexus between Banking System Credits and Industry Production in Turkey: Co-integration and Causality Analysis

The existence of a developed financial system is essential for directing savings to the economy. The effects of the financial system and banks on the economy have been frequently investigated in the literature. This study aims to evaluate the efficiency of banking sector financing to produce output in Turkey. Today, as in many countries, the banking sector has been operating out of a dual banking system, including Islamic and conventional banks in Turkey. In this study, the co- integration and causality relationships between the financing provided by Islamic banks and conventional banks to the real sector and industrial production variables were investigated. According to the Johansen co-integration test results, the financing series provided by industrial production and conventional and Islamic banks to the real sector move together in the long run. According to the VECM causality analysis, a long-term causality relationship between the series from bank loans to industrial production can be mentioned.

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