Islamic and conventional banks' soundness during the 2007–2008 financial crisis

Abstract

The recent global financial crisis has induced a series of failure of many conventional banks and led to an increased interest in the Islamic banking business model. This paper attempts to answer empirically the following question: What was the effect of the 2007-2008 financial crisis on the soundness of Islamic banks and their conventional peers? Using the Z-score as an indicator of bank stability, our regression analysis (covering a matched sample of 34 Islamic Banks (IBs) and 34 conventional banks (CBs) from 16 countries) shows that there is no significant difference in terms of the effect of the financial crisis on the soundness of IBs and CBs. This finding reveals that IBs are diverging from their theoretical business model which would have allowed them to keep the same level of soundness even during the crisis. United Arab Emirates and Yemen. 6 We allow a variation in the interval [50%, 150%]. 7 The null hypothesis tested by the Wilcoxon test is that the two populations represented by the respective members of the matched pairs are identical. 8 We distinguish between the first wave of the world financial crisis and its economic wave starting from 2009.

Banks and economic growth in developing countries: What about Islamic banks?

“…Current researches have discussed the management, regulatory and supervisory challenges associated with Islamic banking (Daly & Frikha, 2015;Jobst, 2007;Murjan & Ruza, 2002;Sole, 2007) the efficiency of IBs using frontier analysis approaches such as data envelopment analysis and stochastic frontier analysis (Abdul-Majid et al, 2010;Belanes & Hassiki, 2011;Srairi, 2010), the characteristics and profitability of IBs (Abedifar, Molyneux, & Tarazi, 2013;Beck et al, 2013;Ben Khediri & Ben-Khedhiri, 2009;Karim & Ali, 1989;Srairi, 2008), and whether it is possible to distinguish between IBs and CBs (Iqbal, 2001;Metwally, 1997;Olson & Zoubi, 2008). Another strand of literature studied the soundness, resilience and financial stability of IBs during the global financial crisis (Abedifar, Philip, & Amine, 2013;Beck et al, 2013;Bourkhis & Nabi, 2013;Caby & Boumediene, 2013;Čihák & Hesse, 2010;Daly, Ghorbel-Zouari, & Frikha, 2013;Hasan & Dridi, 2010). Other works focused on the performance of IBs (Beck et al, 2013;Hasan & Dridi, 2010;Jaouadi, Ben Jazia, & Ziadi, 2014).…”

Investor protection and dividend policy: The case of Islamic and conventional banks

“…Especially, the relatively strong performance of Islamic banks during the contagious subprime mortgage crisis in 2008 has attracted particular research interest (Beck et al, 2013;Bourkhis and Nabi, 2013;Cihak and Hesse, 2010;Hasan and Dridi, 2010). In comparative studies, Hasan and Dridi (2010) and Srairi (2010) show that Islamic banks are relatively more efficient and have superior performance during the financial crisis.…”

Global Financial Crisis and Islamic Financial Products

“…Besides, they emphasize that higher capitalization and better asset quality of Islamic banks led better stock performance during the global financial crisis. From a different point of view, by using Z-score as an indicator of bank stability, Bourkhis and Nabi (2013) assert that there is no significant difference in terms of the effect of the financial crisis on the soundness of Islamic banks and their commercial peers. Gheeraert (2014) in his worldwide analysis covering the period of 2000-2005 argues that Islamic banking leads to a higher banking development without crowding out the conventional banking system.…”