Islamic Banks and Financial Stability: An Empirical Analysis
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The relative financial strength of Islamic banks is assessed empirically based on evidence covering individual Islamic and commercial banks in 19 banking systems with a substantial presence of Islamic banking. We find that (a) small Islamic banks tend to be financially stronger than small commercial banks; (b) large commercial banks tend to be financially stronger than large Islamic banks; and (c) small Islamic banks tend to be financially stronger than large Islamic banks, which may reflect challenges of credit risk management in large Islamic banks. We also find that the market share of Islamic banks does not have a significant impact on the financial strength of other banks.
KeywordsIslamic banking Financial stability
The paper has benefited from detailed suggestions by Daniel Hardy. We also thank Patricia Brenner, Maher Hasan, Nadeem Ilahi, Andreas Jobst, Paul Mills, Abbas Mirakhor, V. Sundararajan, Ramasamy Thillainathan, and participants at the 14th World Islamic Banking Conference in Bahrain, Southwestern Finance Association Annual Conference in Houston, 2nd Emerging Markets Group Conference in London, 4th International Islamic Finance Forum in Hong Kong, seminars at the IMF, Bank Negara Malaysia, and Monash University Malaysia for helpful comments. The views expressed in this paper are those of those of the authors and do not necessarily represent those of their institutions. Any remaining errors are ours.
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