Evaluating Stability in Dual Banking System: Comparison Between Conventional and Islamic Banks in Malaysia

Abstract

Purpose of Study: This paper aims to explore whether Islamic banks are more stable when compared with conventional banks in a dual banking system.
 Methodology: This research employs Pooled OLS methodology for 42 banks, including 27 conventional banks and 15 Islamic banks, for the period of 2005-2016.
 Results: The study suggests that Islamic banks are less stable compared to conventional banks in overall banking sector. Furthermore, it is found that big Islamic banks are less stable than big conventional banks and small Islamic banks are less stable than small conventional banks. The results disapprove of the widespread belief that Islamic banks are more stable and more resilient to adverse shocks in the financial crisis. Moreover, while investigating the shift in overall level of banking stability with respect to financial crises, regardless of bank type and bank size, it is observed that the overall banking stability is enhanced after the financial crises. This is intriguing and a sigh of relief for policy makers and regulators in the country.
 Implications/Applications: This research is of contribution to policy makers and central banks in the countries with highly dual banking environment and for the central banks striving to become International Islamic financial hub.

Competition, Diversification, and Stability in the Indonesian Banking System

“…The Islamic dummy appears to be negative and significant, indicating that Islamic banks are less stable than their conventional counterparts. One of the possible arguments for this finding might be that conventional banks are bigger than Islamic banks, which makes them more stable (Alaeddin, Khattak, and Abojeib, 2019). These findings are in line with Wahid and Dar (2016), who compare the stability of Islamic and conventional banks in Malaysia and found that Islamic banks are lesser stable.…”

“…Loan ratio is used to control the credit exposure of banks, as they might have significant effects on the banks. Furthermore, it is argued that banks that have higher loan ratios are likely to have poor performance and are risky and unstable stable (Alaeddin, Khattak, and Abojeib, 2019). Ideally, a higher loan ratio should increase the level of riskiness; however, it will not be surprising if this research finds a positive relationship between loan ratio and stability measure.…”

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

“…This proxy has been used exhaustively in the literature (Čihák and Hesse; Demirgüç-Kunt and Detragiache, 2011). Z-score is measured at bank-level and is considered as a powerful predictor of banks' default (Alaeddin et al , 2019; Cihak and Hesse, 2010). It employs the accounting data to calculate the solvency risk of a bank.…”