Does competition lead to financial stability or financial fragility for Islamic and conventional banks? Evidence from the GCC countries (original) (raw)
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Emerging Markets Review, 2019
This paper investigates the impact of competition on bank stability using data from 276 banks across eighteen MENA countries between 2006-2015. We controlled for financial inclusion, productivity, and macroeconomic instability in addition to several different control variables, including bank size, efficiency, diversification and leverage. The two-step system GMM suggested that banks facing little competition tended to take less insolvency and credit risks and enjoy more profitability. Furthermore, we found that the competition-fragility effect is more prominent for Islamic banks than conventional ones in MENA countries. This study contains some significant policy implications for regulators looking to improve bank stability.
International Review of Financial Analysis, 2017
The 'competition-stability/fragility' nexus is one of the more debated issues in the banking literature. However, while there is ample evidence concerning the relationship between competition and stability/fragility in different countries and regions, no prior study investigates this in the context of Islamic and conventional banks. We do this using data on both types of banks drawn from 16 developing economies over the period 2000-12. We measure the lack of competition using the Lerner index, and stability using both accountingbased measures, comprising the Z-score and the nonperforming loan ratio, and market-based measures, including Merton's distance to default. We employ panel vector autoregression and two-stage quantile regression to estimate the relationship. Our results lend support to the competition-fragility hypothesis in both Islamic and conventional banks. We also find the magnitude of the market power effect on stability is greater for conventional banks than Islamic banks. Lastly, banks in the median quantile of stability have a greater ability to reduce credit risk through gaining market power than banks in the lower and upper quantiles.
International Journal of Business and Society, 2021
This study comparatively analyses the financial stability of Islamic and conventional banks in Pakistan. Using data of 29 conventional and 9 Islamic banks over 18 years, the study first estimates bank competition and stability using Lerner index and Z-Score, respectively. Generalized least squares regression is used and the coefficients are estimated by using random-effects estimator. Results of the mean comparison show that Islamic banks carry more market power (less competition) and are more stable compared to their conventional counterparts. Results of a panel regression show that competition positively affects the stability of the banking sector and this effect is higher for Islamic banks due to their market power. Results also show that bank stability in Pakistan was reduced during global crisis period; however, presence of Islamic banks contributes to the stability even during crisis. Finally, this study supports the competition-stability hypothesis for Islamic banking in Paki...
Islamic Banks and Financial Stability: An Empirical Analysis of the Gulf Countries
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.
Concentration and Competition in Oman‟s Banking Sector: Implications for Financial Stability
Both the country experiences and the academic debate suggest that concentration and competition have ambiguous effects on financial stability and as such, there is no clear conclusion on the validity of either the competition-stability or the competition-fragility hypotheses. However, it would not be entirely correct to either conclude that these two different strands of the literature yield opposing predictions regarding the effects of competition and market power on banking stability. The visible "trade-off" needs to be addressed by suitable revisit of the "binding constraint" which in this case could be the regulatory competition policy. The standard response to conflicting theoretical predictions is to let the data speak and that is what was done for Oman in this paper.
International Journal of Financial Research, 2019
Purpose: The main purpose of this paper is to investigate the relationship between financial stability in Islamic banks and financial stability and soundness in conventional banks for five GCC countries. Design/methodology/approach: By using time series data, this study employs Pedroni"s panel cointegration to test the long-run relationship between financial stability of Islamic banks and financial stability of conventional banks in GCC countries during the period of (2000-2017). Besides, the study also employs Granger causality to test the causal link between stability of two types of banks (Islamic and Conventional). As well as employing Generalized Least Squares (GLS) to examine the effects between independent variables which are financial stability of conventional banks and their profitability, impact of period of financial crisis (2008/2009), oil prices fluctuations, banking concentration and financial sector development and financial stability of Islamic banks (as the dependent variable). Findings: The findings of this research suggest that there is a long-run, significant and positive relationship between the financial stability of conventional banks and its Islamic counterpart. At the same time, the financial stability of conventional banks is found to Granger caused the stability of Islamic banks. Originality/value: The results of the study contribute towards understanding the determinants of the financial stability of both Islamic banks and conventional banks and how they affect each other. This is important for policy ramifications by the Central Banks in GCC in terms of treating both types of banks differently to mitigate against future financial crises.
Islamic Banks and Financial Stability in the GCC: An Empirical Analysis
2012
Since the inception of Islamic banking in the late 1970s, it has grown rapidly all over the world, especially in the GCC where Islamic banking has rapidly become a substantial part of the financial system. The ongoing turbulence in global financial markets highlights the importance of financial stability for broader economic developments. It is argued that Islamic banking is a viable alternative to promote economic growth and is better-suited to absorb macro-financial shocks because structural advantages over the traditi onal banking. Given the recent political uprisings in the GCC, the financial stability in these countries has become a major concern not only for countries themselves but also for the rest of the world. This study aims to empirically analyse the financial strength of Islamic banks based on the data covering individual Islamic and commercial banks in the GCC, including Turkey. It reveals that the financial stability of the large commercial banks is more stable than t...
BANKING COMPETITION AND FINANCIAL STABILITY: EVIDENCE FROM CIS COUNTRIES
The study provides empirical analysis of the cross-country relationship between a direct measure of competitive conduct of banking system and financial system in CIS 5 countries during the period from 2001 to 2013. We determine the level of banking competition by using Panzar and Rosse H-statistic.
Testing the Financial Stability of Banks in GCC Countries: Pre and Post Financial Crisis
International journal of business and social research, 2013
Stability of the banking system is underpinned through an effective bank monitoring mechanism since the sector is resilient to a range of single and combined shocks. Banks financial stability in the Gulf Cooperation Council (GCC) countries was empirically assessed by using z-score as a dependent variable. A group of macro and microeconomic independent variables were selected to measure their effects on banks stability. All banks in this region that are considered Conventional or Islamic banks were selected. The targeted period was 2003-2010 to cover pre- and post- financial crisis. It was found that there is no evidence that there is a significant difference between the financial stability of Conventional and Islamic banks for the periods 2003-2010, 2003-2007, and 2008-2010. However, Conventional banks tend to be financially stronger than Islamic banks for the pre- financial crisis.