Regulatory capital and stability of Islamic and conventional banks

Abstract

Purpose The purpose of this paper is twofold. First, it attempts to determine the factors that influence the stability of Islamic and conventional banks. Second, it focuses on the relationship between the regulatory capital and bank soundness. Design/methodology/approach Thus, the authors use the Z-score to assess the stability of Islamic and conventional banks operating in the Middle East and North Africa region over the period 1999 to 2014. Findings The comparative analysis reveals that Islamic banks seem to be less stable than their conventional peers. With regard to the determinants of bank stability, the findings suggest that the regulatory capital represents the primordial factor that reinforces the soundness of banking systems. The authors also find that bank stability depends on both bank-specific variables as well as macroeconomic and institutional variables. Interestingly, the corruption level turns out to have a significant negative effect on financial strength in the both types of banks. Originality/value The authors believe that investigating the relationship between regulatory capital and the failure risk in a comparative study between Islamic and conventional banks deserves a particular attention and looks very interesting because it will allow them to identify the difference between the factors explaining the failure risk of each type of banks. The authors also believe that the analysis of the relationship between corruption and bank stability is very interesting because corruption can be seen as an example of moral hazard which forces Islamic banks to use non-PLS instruments.

Does Islamic Banking Promote Financial Stability? Evidence From an Agent-Based Model

“…Some authors assert that only small Islamic banks are capable of promoting stability (Abedifar et al, 2013;Alqahtani & Mayes, 2018;Cihak & Hesse, 2010). Finally, some scholars conclude that Islamic banks do not play a stabilising role during times of financial distress and that conventional banks are superior in terms of financial stability (Alandejani, Kutan, & Samargandi, 2017;Aysan & Ozturk, 2018;Korbi & Bougatef, 2017).…”

Assessing the stability of the banking system based on fuzzy logic methods

“…Considerable attention is paid to ensuring the stability of the banking system in countries with Islamic banking. Among the studies on this topic, it is worth noting Rashid (2017), Korbi and Bougatef (2017), Mawardi (2020), Subbar and Vladimirovich (2020), Rizvi (2020). Barra and Zotti (2019) emphasize that the stability of the banking system depends on the type of banks and, to a lesser extent, on the level of concentration in the system.…”

The determinants of bank stability: Evidence from selected Balkan countries and Turkey

“…While some of studies use only countrylevel data [2], [18], [19], some others use both bank and country level data [20]. However, there is limited studies about both Islamic and conventional banking stability [21], [1]. Diaconu and Oanea [22] used only countries-level data.…”

“…The 2007-2008 US sub-financial crisis and its consequences on the general economy have increased interest in investigating bank failures that have become central to political and economic debates [1]. In that perıod, leading famous banks and financial institutions (for example Lehman Brothers) had gone bankrupt or recorded huge losses, posing a high risk in the financial market.…”