Bank Credit in Uncertain Times: Islamic vs. Conventional Banks

Abstract

This paper explores whether the impact of economic uncertainty on credit growth differs for Islamic vs. conventional banks. Using a sample of 416 banks (58 Islamic and 358 conventional) in 12 countries, the findings indicate that an increase in economic uncertainty significantly decreases the credit growth of conventional banks but does not have any significant impact on Islamic banks' credit growth. Our results are robust to alternative specifications and addressing endogeneity concerns using GMM estimators. We further observe that our findings are stronger for the following countries: (1) countries with explicit deposit insurance protection system for Islamic banks, (2) lower foreign dominance, and (3) countries with a higher share of deposits and assets in Islamic banks.

Economic Uncertainty and Bank Stability: Conventional vs. Islamic Banking

“…Another advantage of WUI is that it tracks economic uncertainty on a continuous basis and captures the fact that uncertainty is present in both normal and crisis times (Bilgin et al, 2020), which makes it a much more powerful indicator than using dummy variables. For example, using a dummy variable to capture the 2007-2009 global financial crisis, which is what most cross-country studies do, can be very limited when the sample countries exhibit strong economic heterogeneity.…”