Islamic Banks and Financial Stability: An Empirical Analysis of the Gulf Countries (original) (raw)

The recent financial crisis of 2007-2008 is a good experiment to test the difference between the Islamic and the conventional model in terms of stability and banking risk. Using Z-score as an indicator of banking stability, our regression analysis (covers a matched sample of 136 banks from the Gulf countries in which (50) banks are Islamic and (86) are conventional between 2003 and 2012. Up to now, we have obtained the following results: small Islamic banks tend to be financially more stable than small conventional ones, large conventional banks tend to be financially more stable than large Islamic banks, and small Islamic banks tend to be financially stronger than large Islamic banks. Empirical results also show that conventional banks were most affected by the financial crisis. Similarly, analyzing the impact of Islamic banks on financial stability by studying the effect of market share in terms of credit supply, the empirical results show that the increase in market share in terms of the offering of loans by Islamic banks negatively affects financial stability, and thus leads to the increase of market share in terms of credit supply for conventional banks improving financial stability.