Does Islamic banking really strengthen financial stability? Empirical evidence from Pakistan

2017 ◽  
Vol 10 (2) ◽  
pp. 130-148 ◽  
Author(s):  
Abdul Rashid ◽  
Saba Yousaf ◽  
Muhammad Khaleequzzaman
Keyword(s):  
Financial Stability ◽  
Banking System ◽  
Islamic Banks ◽  
Z Score ◽  
Content Type ◽  
Macroeconomic Indicators ◽  
Conventional Banks ◽  
The Stability ◽  
Underlying Variable ◽  
Empirical Framework

Purpose This paper aims to empirically assess the contribution of Islamic banks toward the financial stability of Pakistan. For this, the authors investigate the relative financial strength of Islamic banks and their contribution toward the financial stability. They also examine the relationship between the competitive conduct of banks and banking system stability. Design/methodology/approach The authors use quarterly data of ten conventional banks, four full-fledged Islamic banks and six standalone Islamic branches of conventional banks of Pakistan for the period 2006-2012. The z-score has been computed and used as the measure of stability of banks and the random effects estimator applied to quantify the impact of bank-specific variables and macroeconomic indicators on the financial stability. The empirical framework used in the paper enables the authors us to examine the differential effect of each underlying variable on the financial stability across Islamic and conventional banks. To check the robustness of the results, the authors have estimated several models with different specifications. Findings The regression results indicate that income diversity, profitability ratio, loan to asset ratio, asset size and the market concentration ratio of banks have significant effects on the stability of banks. Comparing Islamic and conventional banks, notable differential effects of the empirical determinants of financial stability for Islamic and conventional banks have been observed. The results suggest that Islamic banks have performed better as compared to conventional banks and contributed more effectively in the stability of financial sector. Overall, the results depict that the contribution of Islamic banks toward the financial stability has been reasonable and prospective. Practical implications The empirical results of the paper are very useful not only for banks’ managements but also for the investors, bank customers and policymakers. Specifically, the findings help in enhancing our understanding as to how the bank-specific variables and macroeconomic indicators are related to the financial stability of the banking system. The results also help understand the role of both Islamic and conventional banks in the financial stability. Further, the results suggest that the financial soundness can be enhanced by creating healthy competition in the banking industry. The results about macroeconomic indicators imply that protective measures are required to intensify (mitigate) the positive (negative) effect of gross domestic product (inflation) on banks’ financial stability. Originality/value This paper provides an overall comparative analysis of financial stability of both Islamic and conventional banks of Pakistan. First, the paper computes the z-score for each bank included in the sample, and then, it performs the regression analysis to study how bank-specific variables and macroeconomic factors are related to the financial stability of banks. Unlike the previous studies, our empirical framework enables the authors to examine the differential effect of each underlying variable on the financial stability across Islamic and conventional banks.

scholarly journals Panel modeling of z-score: evidence from Islamic and conventional Saudi banks

2019 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hassan Belkacem Ghassan ◽  
Abdelkrim Ahmed Guendouz
Keyword(s):  
Financial Stability ◽  
Banking Sector ◽  
Stability Index ◽  
Z Score ◽  
Strong Concentration ◽  
Content Type ◽  
Quarterly Data ◽  
Annual Frequency ◽  
Conventional Banks ◽  
The Stability

Purpose This paper aims to measure the stability extent of the banking sector in Saudi Arabia, including Islamic and conventional banks (CBs), using quarterly data. Design/methodology/approach The paper uses seemingly unrelated regressions to estimate the determinants of the z-score. Findings The panel data model shows that Islamic banks (IBs) reduce the financial stability index relatively; meanwhile, they contribute efficiently to enhance the financial stability through the diversification of their assets. The Saudi banking sector exhibits strong concentration affecting the financial stability negatively. Research limitations/implications The paper’s topic can be extended to cover the recent period. Practical implications The limited presence of IBs in the Saudi banking sector jeopardizes any effort to improve the financial stability. Social implications By attracting more clients, IBs would contribute more to the financial stability in the Saudi economy. Also, the monetary authority has to expand the share of IBs in the financial system at least 50-50 compared to CBs. Originality/value The z-score is mostly analyzed with yearly data; in this paper we use quarterly data to describe at infra-annual frequency the variability of the z-score index. Also, we consider in detail the statistical properties of the banks’ data.

scholarly journals FINANCIAL STABILITY OF ISLAMIC AND CONVENTIONAL BANKS IN BANGLADESH: REVISITING STABILITY MEASURES AND ANALYZING STABILITY BEHAVIOR

2018 ◽  
Vol 3 (2) ◽  
pp. 293-314
Author(s):  
Md Enayet Hossain ◽  
Mahmood Osman Imam
Keyword(s):  
Financial Stability ◽  
Panel Data Analysis ◽  
Capital Adequacy ◽  
Islamic Banks ◽  
Z Score ◽  
Panel Regressions ◽  
Capital Adequacy Ratio ◽  
Z Scores ◽  
Conventional Banks ◽  
The Stability

This study intends to assess the relative financial stability of Islamic banks in Bangladesh using three different Z-Scores as financial stability measures, based on a sample of 29 listed commercial banks (23 conventional and 6 Islamic) in Bangladesh over the period 2005-2016. Apart from the existing measure of financial stability, Z-Score, the paper contributes to the literature by developing an alternative Z-Score based on bank’s loan portfolio infection ratio. We first use pair-wise comparison and find that Islamic banks are financially more stable in two stability measures i.e. Z-Score (based on Capital Adequacy Ratio) and Z-Score (based on Infection Ratio). We then perform static (random effects) and dynamic (GMM) panel data analysis. By controlling for bank-specific, industry-specific and macroeconomic variables in the regressions, we find that Islamic banks are financially more stable in 2 panel regressions of Z-Score (based on Infection Ratio). We also find that the presence of Islamic banks increases the stability of all banks in the system including their conventional peers.

scholarly journals Basel Compliance and Financial Stability: Evidence from Islamic Banks

2020 ◽  
Author(s):  
Mohammad Bitar ◽  
Sami Ben Naceur ◽  
Rym Ayadi ◽  
Thomas Walker
Keyword(s):  
Financial Services ◽  
Financial Stability ◽  
Financial System ◽  
Islamic Banks ◽  
Z Score ◽  
Capital Ratios ◽  
Conventional Banks ◽  
The Stability ◽  
Global Financial System ◽  
Positive Effect

Abstract We find that compliance with the Basel Core Principles (BCPs) has a strong positive effect on the stability of conventional banks, and a positive but less pronounced effect on the stability of Islamic banks. We also find that the main impact of compliance is an increase in capital ratios, whereas other components of the Z-score are negatively affected. This reflects the desire of banks to be more closely integrated into the global financial system by holding higher capital ratios. The findings also justify the 2015 decision of the Islamic Financial Services Board to publish similar principles for Islamic banks.

scholarly journals Financial Stability of Conventional and Islamic Banks: Empirical Evidence

2020 ◽  
Vol 10 (1) ◽  
pp. 30
Author(s):  
Ilyes Abidi ◽  
Mariem Nsaibi ◽  
Boutheina Regaieg
Keyword(s):  
Financial Stability ◽  
Risk Indicators ◽  
Slight Reduction ◽  
Islamic Banks ◽  
Macroeconomic Indicators ◽  
Effectiveness And Efficiency ◽  
Conventional Banks ◽  
The Stability ◽  
Efficiency Indicators ◽  
Conventional And Islamic Banks

The aim of this paper is to study the stability of Islamic banks vs. conventional banks. Unlike previous works on this topic, we used profitability, solvency, productivity, investment and risk indicators, as well as macroeconomic indicators. Likewise, we used effectiveness and efficiency indicators, determined via the SFA and DEA method respectively.The banks in our sample were selected based on their contribution to the total assets of both types of finance. This selection method allowed us to have a global idea on the effectiveness, efficiency, risk and stability of the two banking sectors.This empirical investigation revealed that Sharia-compatible banks are more efficient than conventional banks. In contrast, Islamic banks are less efficient and riskier than conventional banks. They lose on average 5.795% and 3.9413% of their assets, respectively, as credit risk and operational risk. In terms of market risk, Islamic banks are less risky than conventional banks. They lost 3,214% of their assets over the 2004-2014 period, compared with 4,119% for conventional banks.All in all, the two types of institutions were able to resist the crisis despite the slight reduction in activity and the minimal decrease in their stability scores due to the decline in activity and the prudent policy they adopted.

scholarly journals EVALUATION OF DUAL BANKING SYSTEM IN BANKING IN INDONESIA

2020 ◽  
Vol 11 (2) ◽  
Author(s):  
Amanatun Nisfah Nurun Nikmah ◽  
Tulus Suryanto ◽  
Surono Surono
Keyword(s):  
Financial Stability ◽  
Banking System ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Common Goal ◽  
The Face ◽  
Capital Access ◽  
Conventional Banks ◽  
Banking Institution ◽  
Negative Factors

Evaluation of Dual Banking System in Indonesia. Dual Banking System is the application of two banking systems in one banking institution, namely conventional banking and Islamic banking. Indonesia can optimize the dual banking system through strength share and weakness cover, namely Islamic banks are generally superior in terms of a more stable system in the face of market changes but have deficiencies in infrastructure, whereas conventional banks have large market and capital access and more infrastructure complete, but very vulnerable to crises due to the negative factors of economic integration which are already very strong. The superiority of the dual banking system concept is seen in two separate systems that operationally do not affect each other, but have one common goal, namely financial stability that supports economic growth. So, to achieve this goal the two systems can work together in external factors such as access to capital, infrastructure, supervision or clearing systems that can help interbank liquidity.

Credit risk in dual banking systems: does competition matter? Empirical evidence

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohsin Ali ◽  
Mudeer Ahmed Khattak ◽  
Nafis Alam
Keyword(s):  
Credit Risk ◽  
Banking System ◽  
Islamic Banks ◽  
Content Type ◽  
Panel Data Estimation ◽  
System A ◽  
Size Groups ◽  
Conventional Banks ◽  
Fierce Competition ◽  
Data Estimation

PurposeThe study of credit risk has been of the utmost importance when it comes to measuring the soundness and stability of the banking system. Due to the growing importance of Islamic banking system, a fierce competition between Islamic and conventional banks have started to emerge which in turn is impacting credit riskiness of both banking system.Design/methodology/approachUsing the system GMM technique on 283 conventional banks and 60 Islamic banks for the period of 2006–2017, this paper explores the important impact of size and competition on the credit risk in 15 dual banking economies.FindingsThe authors found that as bank competition increases credit risk seems to be reduced. On the size effect, the authors found that big Islamic banks are less risky than big conventional banks whereas small Islamic banks are riskier than small conventional banks. The results are robust for different panel data estimation models and sub-samples of different size groups. The findings of this paper provide important insights into the competition-credit risk nexus in the dual banking system.Originality/valueThe paper is specifically focused on credit risk in dual banking environment and tries to fill the gap in the literature by studying (1) do the Islamic and conventional banks exhibit a different level of credit risk; (2) does competition in the banking system impact the credit risk of Islamic and conventional banks and finally (3) do the big and small banks exhibit similar levels of credit risk.

When benchmark rates change: the case of Islamic banks

2019 ◽  
Vol 27 (2) ◽  
pp. 197-214
Author(s):  
Simon Archer ◽  
Rifaat Ahmed Abdel Karim
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Services ◽  
Financial Stability ◽  
Descriptive Analysis ◽  
Interest Rate Risk ◽  
Islamic Banks ◽  
Content Type ◽  
Study Approach ◽  
Conventional Banks

Purpose This paper aims to examine the issue that arises in the context of benchmark rate (or interest rate) changes made for reasons of monetary policy in a jurisdiction with a significant presence of Islamic banks. Changes, especially increases, in the prevailing interest rate made by central banks raise issues of asset-liability management for banks, which typically have longer maturities on the asset side than on the liabilities side, resulting in exposure to interest rate risk for conventional banks, and what is known as rate of return (RoR) risk for Islamic banks, which for reasons of compliance with Islamic religious law (Shari’ah) do not use interest in their operations. Islamic banks use various financial instruments which reflect the cost of funds by means of contracts of sale on credit or of leasing or forms of partnership, which allow them to earn returns on their funds and to pay returns to customers who deposit funds with them. Design/methodology/approach The methodology of this study consisted of a descriptive analysis of the relevant characteristics of Islamic banks and their economic and regulatory environments, illustrated by a case study approach applied to two jurisdictions, namely, Sudan and Malaysia. Findings In jurisdictions where Islamic banks represent a significant share of the market for financial services, if the contracts used in Islamic financing allow for periodic adjustments of the profit rate or lease rental, this could result in a significant impediment to the full implementation of monetary policy and hence to the maintenance of financial stability. Originality/value This study is (to the best of authors’ knowledge) the first thorough analysis in the literature of the issues arising from the exposure of Islamic banks to RoR risk and has clear implications for regulatory and central bank policy.

scholarly journals Influence of economic freedom and its subcomponents on risk-taking behavior

2019 ◽  
Vol 12 (4) ◽  
pp. 335-356 ◽  
Author(s):  
Rafik Harkati ◽  
Syed Musa Alhabshi ◽  
Salina Kassim
Keyword(s):  
Risk Taking ◽  
Economic Freedom ◽  
Banking Sector ◽  
Banking System ◽  
Islamic Banks ◽  
Content Type ◽  
Economic Freedom Index ◽  
Risk Taking Behavior ◽  
The Government ◽  
Conventional Banks

Purpose The purpose of this paper is to investigate the influence of economic freedom and six relevant subcomponents of it on the risk-taking behavior of banks in the Malaysian dual banking system. It also aims to make a comparative analysis between Islamic and conventional banks operating in this dual banking sector. Moreover, the study is an effort to enrich the existing literature by presenting empirical evidence on the argument that the risk-taking behavior of the two types of banks is indistinguishable given that they operate in the same regulatory environment. Design/methodology/approach Secondary data of all banks operating in the Malaysian banking sector are collected from FitchConnect database, in addition to the economic freedom index from Foundation Heritage for the period 2011–2017. Generalized least squares technique is employed to estimate the influence of economic freedom and the six relevant subcomponents of it on the risk-taking behavior of banks. Findings The level of economic freedom influenced risk-taking behavior within the banking sector as a whole, conventional and Islamic banking sectors negatively during the study period (2011–2017). Risk-taking behavior of conventional and Islamic banks is similar. However, conventional banks turn to be less influenced by economic freedom level as compared to Islamic banks. Practical implications The government and regulators may benefit from the results by rethinking and setting the best economic freedom index that better serves the stability of the banking system, and lessens banks’ risk-taking inclination. Originality/value To the present time, this paper is thought to be of a significant contribution. Given the argument that Islamic and conventional banks behave in the same way. This is one of the first attempts to address this issue in light of the influence of economic freedom and six subcomponents of it on the risk-taking behavior of banks operating in a dual banking system.

scholarly journals BANK RUN AND STABILITY OF ISLAMIC BANKING IN INDONESIA

2017 ◽  
Vol 3 (1) ◽  
pp. 25-60 ◽  
Author(s):  
Rahmatina A. Kasri ◽  
Tika Arundina ◽  
Kenny D. Indraswari ◽  
M. Budi Prasetyo
Keyword(s):  
Factor Analysis ◽  
Financial Stability ◽  
Banking System ◽  
Bank Runs ◽  
Primary Data ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Bank Run ◽  
Banking Stability ◽  
Conventional Banks

Bank run is an important economic phenomenon which increasingly occurred in in modern banking system and potentially threatened banking stability as it could trigger a banking crisis. However, most studies related to bank run focus on the occurrence of bank run in conventional banking system. Very few of them discuss the bank run phenomenon under Islamic banking system or dual banking system where Islamic banks jointly operating with conventional banks. Therefore, this study attempts to analyze the determinants of bank run in the Indonesian Islamic banking industry by employing primary data from 256 customers of Indonesia Islamic banks in 2015 and by utilizing factor analysis and descriptive statistics. In theory, Islamic banks tend to be more resilient towards any macroeconomic or financial shocks as compared to conventional banks due to the nature of its asset-based and risk-sharing arrangement. However, the result exhibits that both psychological and fundamental factors (i.e. macroeconomics and bank fundamentals) strongly influence the behaviors of Islamic banking depositors to withdraw their funds, which might trigger the occurrence of bank runs in the country. Insider information, macroeconomic condition and bank fundamental factors are also shown to have the highest impacts among all variables. Hence, in the context of banking stability, the finding implies that Islamic banks are not completely immune to the impacts of macroeconomic shocks or financial crisis. As a country with a dual banking system, Indonesia had experienced several bank runs since 1990s. Therefore, the findings of the study should provide the policy makers important insight into research based-policy in order to attain financial stability as one of the main economic goals of the country.Keywords: Bank run, Islamic bank, Factor analysis, IndonesiaJEL Classification: C83, G21, G28

scholarly journals Impact of Basel Accord on Banking System (Evidence from Islamic Banks of Pakistan)

2015 ◽  
Vol 1 (2) ◽  
pp. 1
Author(s):  
Muhammad Mehtab Azeem ◽  
Akin Marsap ◽  
Cigdem Ozari
Keyword(s):  
Banking System ◽  
Islamic Banking ◽  
Basel Iii ◽  
Islamic Banks ◽  
Basel Accord ◽  
Trade Off ◽  
Financial Anomalies ◽  
Conventional Banks ◽  
The Stability ◽  
The Impact

Banks and bank regulatory authorities are vital players for the stability of economy and financial system in potential way. Basel III and its related to capital’s requirement obligations have been effective useful tool for the banking system. Since, this is tough job for the bankers to maintain the liquidity for hedging the future risk but it also been expensive for bankers to keep the extra capital and become more liquid since this discourage the provision of loans but promote the credit ratings. However, it has become necessary to investigate the impact of Basel III on Islamic banking system and analyze the trade off. The study analyzes empirically on the (Financial) anomalies in term of three factors (i) Financial size (ii) Spread and (iii) Provisions for non performing financing. The study also discusses the impact of Basel III on Islamic banking performance if applicable, in context of trade off and impact on country’s economy. We can ask that Basel III framework is difficult to be consistent for conventional banks; we can also realize that either new regulation will be flexible for Islamic banks under Basel III while Islamic and Conventional banks are totally different. Further, we shall estimate if the Basel III is more or less important in Islamic banks of Pakistan than conventional banks. At the end, we shall see from theoretical framework either the impact of Basel III is important for Islamic banks if and only if Islamic banks adopt to follow Basel III regulations and analyzing the potential influence on conventional banks.

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