Springer Nature is making SARS-CoV-2 and COVID-19 research free. View research | View latest news | Sign up for updates

Financial soundness of single versus dual banking system: explaining the role of Islamic banks


This paper empirically investigates the financial stability of the countries having both Islamic and conventional banks versus the countries having only conventional banks. It also examines the ability of Islamic banks to provide stability to the overall financial system. The analysis is carried out for a sample of 416 banks drawn from 39 countries over the period 1995–2014. The results provide sound evidence that the dual banking system is more stable than the single banking system. Higher stability is attributed to the presence of Islamic banks in the dual banking system. Furthermore, when only the dual banking system is investigated, the results strongly confirm the greater stability of Islamic banks as compared to their conventional counterparts. Although Islamic banks are mimicking conventional banking practices, their increased interactions with the real economy, investments in real assets, non-aggressive lending profile, and limited exposures to speculative activities make them more resilient and protected.

This is a preview of subscription content, log in to check access.


  1. 1.

    Financial stability can be defined as a condition in which the financial system–comprising financial intermediaries, markets, and market infrastructure – is capable of withstanding shocks and the unraveling of financial imbalances, thereby mitigating the likelihood of disruptions in the financial intermediation process which are severe enough to significantly impair the allocation of savings to profitable investment opportunities” (ECB 2007)”.

  2. 2.

    These countries having a market share of more than 15% of total banking assets.

  3. 3.

    Countries with double banking system: (No. of Conventional Banks, No. of Islamic Banks) Egypt (10, 2), Indonesia (37, 1), Palestine (83, 85), Pakistan (19, 2), Turkey (12, 1), Bangladesh (22, 7), Jordan (11, 3), Kuwait (89),Oman (81, 91), Qatar (7, 3), Saudi Arabia (8, 4), United Arab Emirates (17, 7), Bahrain (12, 6), Brunei Darussalam (81), Maldives (81), Gambia (8, 1), Yemen (87, 89), Iraq (12, 7), Syria (13, 2), Mauritania (9, 2).

  4. 4.

    Countries with single banking system (Total numbers of Conventional banks) Portugal (87), Poland (14), Norway (23), Mexico (83), Malta (85), Italy (13), Hungry (81), Finland (83), Greece (7), Hong Kong (8), Austria (7), Belgium (85), Colombia (7), Sweden (87), Spain (8), Zimbabwe (81), Argentina (91), Taiwan (12), Ukraine (11).

  5. 5.

    ID is defined as \( \kern0.5em 1-\left[\frac{Net\ interest\ income- other\ operating\ income}{Total\ operating\ income}\right] \).


  1. Abedifar P., Molyneux P., Tarazi A., (2011), “Risk and stability in Islamic banking”, Working Paper. Bangor Business School

  2. Agusman A, Monroe GS, Gasborro D, Zumwalt JK (2008) Accounting and capital market measures of risk: evidence from Asian banks during 1998-2003. J Bank Financ 32(4):480–488

  3. Alaro AR, Hakeem M (2011) Financial engineering and financial stability: the role of Islamic financial system. Journal of Islamic Economics, Banking and Finance 7(1):25–38

  4. Alexakis C, Izzeldin M, Johnes J, Pappas V (2018) Performance and productivity in Islamic and conventional banks: evidence from the global financial crisis. Econ Model 79:1–14

  5. Almazari AA (2014) Impact of internal factors on bank profitability: comparative study between Saudi Arabia and Jordan. Journal of Applied Finance & Banking 4(1):125–140

  6. Alqahtani F, Mayes DG, Brown K (2016) Economic turmoil and Islamic banking: evidence from the Gulf cooperation council. Pac Basin Financ J 39:44–56

  7. Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297

  8. Arellano M, Bover O (1995) Another look at the instrumental variables estimation of error components models. J Econ 68(1):29–51

  9. Ariss RT (2010) Competitive conditions in Islamic and conventional banking: a global perspective. Rev Financ Econ 19(3):101–108

  10. Ashraf D, Rizwan MS, L’Huillier B (2016) A net stable funding ratio for Islamic banks and its impact on financial stability: an international investigation. J Financ Stab 25:47–57

  11. Athanasoglou PP, Brissimis SN, Delis MD (2008) Bank-specific, industry-specific and macroeconomic determinants of bank profitability. J Int Financ Mark Inst Money 18(2):121–136

  12. Bacha O (1997) Adapting Mudarabah financing to contemporary realities: a proposed financing structure. Journal of Accounting Commerce and Finance 1(1):26–54

  13. Baele L, Farooq M, Ongena S (2014) Of religion and redemption: evidence from default on Islamic loans. J Bank Financ 44:141–159

  14. Bashir A (2003) Determinants of profitability in Islamic banks: some evidence from the Middle East. Islam Econ Stud 11(1):31–57

  15. Beck T, Demirguç-kunt A, Merrouche O (2013) Islamic vs. conventional banking: business model, efficiency and stability. J Bank Financ 37(2):433–447

  16. Berger AN (1995) The relationship between capital and earnings in banking. J Money, Credit, Bank 27(2):432–456

  17. Bikker JA, Hu H (2002) Cyclical patterns in profits, provisioning and lending of banks and procyclicality of the new Basel capital requirements. BNL Quarterly Review 55:143–175

  18. Bilal M, Saeed A, Gull AA, Akram T (2013) Influence of bank specific and macroeconomic factors on profitability of commercial banks: a case study of Pakistan. Research Journal of Finance and Accounting 2(2):117–126

  19. Bitar M, Madiès P, Taramasco O (2017) What makes Islamic banks different? A multivariate approach. Econ Syst 41(2):215–235

  20. Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econ 87(1):115–143

  21. Bond S (2002) Dynamic panel data models: a guide to micro data methods and practice. Port Econ J 1(2):141–162

  22. Boumediene, A., & Caby, J. (2009). The stability of Islamic banks during the subprime crisis. Available at SSRN 1524775

  23. Bourkhis K, Nabi MS (2013) Islamic and conventional banks’ soundness during the 2007–2008 financial crisis. Rev Financ Econ 22(2):68–77

  24. Chapra M U (2016). The future of economics: An Islamic perspective (Vol. 21). Kube Publishing Ltd.

  25. Chong S, Liu M (2009) Islamic banking : interest-free or interest-based? Pac Basin Financ J 17(1):125–144

  26. Cihak M, Hesse H (2010) Islamic banks and financial stability: an empirical analysis. J Financ Serv Res 38(2–3):95–113

  27. Dar HA, Presley JR (2000) Lack of profit and loss sharing in Islamic banking: management and control imbalances. International Journal of Islamic Financial Services 2(2):3–18

  28. Demirguc-Kunt A, Huizinga H (1999) Determinants of commercial bank interest margins and profitability: some international evidence. World Bank Econ Rev 13(2):379–408

  29. Demirguc-Kunt A, Detragiache E, Thierry Tressel T (2008) Banking on the principles: compliance with Basel Core principles and Bank soundness. J Financ Intermed 17(4):511–542

  30. Doumpos M, Hasan I, Pasiouras F (2017) Bank overall financial strength: Islamic versus conventional banks. Econ Model 64:513–523

  31. El-Hawary D, Grais W, Iqbal Z (2007) Diversity in the regulation of Islamic financial institutions. The Quarterly Review of Economics and Finance 46(5):778–800

  32. Gamaginta, Rokhim R (2015) The stability comparison between Islamic banks and conventional banks : evidence in Indonesia. Financial Stability and Risk Management in Islamic Financial Institutions 101

  33. Ghassan HB, Taher FB (2013) Financial stability of Islamic and conventional banks in Saudi Arabia: evidence using pooled and panel models. Gulf Research Center 2:1–33

  34. Greuning VH, Iqbal Z (2008) "Risk Analysis for Islamic Banks”, The World Bank

  35. Hakenes H, Schnabel I (2011) Bank size and risk-taking under Basel II. J Bank Financ 35(6):1436–1449

  36. Hansen LP (1982) Large sample properties of generalized method of moments estimators. Econometrica 50(4):1029–1054

  37. Hasan M, Dridi J (2011) The effects of the global crisis on Islamic and conventional banks: a comparative study. Journal of International Commerce, Econ Policy 02(02):163–200

  38. Hassan K, Khan A, Paltrinieri A (2019) Liquidity risk, credit risk and stability in Islamic and conventional banks. Res Int Bus Financ 48:17–31

  39. Hassan MK (2006) The X-efficiency in Islamic banks. Islam Econ Stud 13(2):49–78

  40. Hassan MK, Bashir AHM (2003, December). Determinants of Islamic banking profitability. Paper presented at the proceedings of the economic research forum (ERF) 10th annual conference, Marrakesh–Morocco

  41. Hesse H, Cihak M (2007). Cooperative banks and financial stability. International Monetary Fund

  42. How JC, Karim MA, Verhoeven P (2005) Islamic financing and bank risks: The case of Malaysia. Thunderbird International Business Review, 47(1):75–94

  43. Hussein K (2010) Bank-level stability factors and consumer confidence – a comparative study of Islamic and conventional banks' product mix. J Financ Serv Mark 15(3):259–270

  44. Ibrahim M, Rizvi S (2018) Bank lending, deposits and risk-taking in times of crisis: a panel analysis of Islamic and conventional banks. Emerg Mark Rev 35:31–47

  45. Islamic Financial Services Board. (2017). Islamic financial services industry stability report. Retrieved from https://www.ifsb.org

  46. Kabir MN, Worthington A, Gupta R (2015) Comparative credit risk in Islamic and conventional bank. Pac Basin Financ J 34:327–353

  47. Kaufmann D, Kraay A, Mastruzzi M (2005) Governance Matters IV: Governance Indicators for 1996–2004. World Bank, Washington mimeo

  48. Khan M (1986) Islamic interest-free banking: a theoretical analysis. IMF Staff Pap 33:1–27

  49. Khan T, Ahmed H (2001) Risk management: an analysis of issues in Islamic financial industry. Occasional Paper No. 5, IRTI, Islamic Development Bank, Jeddah

  50. Kosmidou K, Pasiouras F, Doumpos M, Zopounidis C (2006) Assessing performance factors in the UK banking sector: a multicriteria approach. CEJOR 14(1):25–44

  51. Kuran T (2004) Islam and mammon: the economic predicaments of Islamism. Princeton University Press, Princeton

  52. Kwan S, Eisenbeis RA (1997) Bank risk, capitalization, and operating efficiency. J Financ Serv Res 12(2–3):117–131

  53. Lindgren CJ, Garcia G, Saal MI (1996), “Bank soundness and macroeconomic policy”, International Monetary Fund

  54. Mahdi I, Abbes M (2018) Relationship between capital, risk and liquidity: a comparative study between Islamic and conventional banks in MENA region. Res Int Bus Financ 45:588–596

  55. Masood O, Ashraf M (2012) Bank specific and macroeconomic profitability determinants of Islamic banks. Qualitative Research in Financial Markets 4(2/3):255–268

  56. Miah MD, Uddin H (2017) Efficiency and stability: a comparative study between Islamic and conventional banks in GCC countries. Future Business Journal 3(2):172–185

  57. Mills P, Presley J (1999) Islamic finance: theory and practice. Macmillan, London

  58. Mirza N, Rahat B, Reddy K (2015) Business dynamics, efficiency, asset quality and stability: the case of financial intermediaries in Pakistan. Econ Model 46:358–363

  59. Mobarek A, Kalonov A (2014) Comparative performance analysis between conventional and Islamic banks: empirical evidence from OIC countries. Appl Econ 46(3):253–270

  60. Mollah S, Zaman M (2015) Shari’ah supervision, corporate governance and performance: conventional vs. Islamic banks. J Bank Financ 58(2015):418–435

  61. Nosheen, Rashid A (2019). Business orientation, efficiency, and credit quality across business cycle: Islamic versus conventional banking. Are there any lessons for Europe and Baltic States?, Baltic Journal of Economics, 19:1, 105–135

  62. Obaidullah M (2005) Islamic financial services. Islamic Economic Research Centre, King Abdulaziz University, Jeddah

  63. Okumus HS, Artar OK (2012) Islamic banks and financial stability in the GCC: an empirical analysis. Istanbul Ticaret Üniversitesi Sosyal Bilimler Dergisi 11(21):147–164

  64. Olson D, Zoubi T (2016) Convergence in bank performance for commercial and Islamic banks during and after the global financial crisis. The Quarterly Review of Economics and Finance 65:71–87

  65. Rahim SRM, Zakaria H (2013) Comparison on stability between Islamic and conventional banks in Malaysia. Journal of Islamic Economics, Banking and Finance 9(3):131–148

  66. Ramlana H, Adnan M (2016) The profitability of Islamic and conventional Bank: case study in Malaysia. Procedia Economics and Finance 35:359–367

  67. Rashid A, Riaz M, Zaffar A (2018) Are Islamic banks really different from conventional banks? An investigation using classification techniques. Journal of Islamic Business and Management 8(1):37–52

  68. Rashid A, Yousaf S, Khaleequzzaman M (2017) Does Islamic banking really strengthen financial stability? Empirical evidence from Pakistan. Int J Islam Middle East Financ Manag 10(2):130–148

  69. Samad A (2004) Performance of interest-free Islamic banks Vis-A-Vis interest-based conventional banks of Bahrain. IIUM Journal of Economics and Management 12(2):1–25

  70. Samad A, Hassan MK (2006) The performance of Malaysian Islamic bank during 1984–1997: an exploratory study. International journal of Islamic financial services 1(3)

  71. Schaeck K, Čihák M, Wolfe S (2006) “Are more competitive banking systems more stable?” IMF working paper 06/143. International Monetary Fund, Washington

  72. Schoon N (2010) Islamic Banking and Finance, Spiramus Press, London

  73. Shayegani B, Arani MA (2012) A study on the instability of banking sector in Iran economy. Aust J Basic Appl Sci 6(1):213–221

  74. Siddiqi MN (2006) Islamic banking and finance in theory and practice. Islam Econ Stud 13(2):2–48

  75. Staikouras C, Wood G (2003) “The determinants of bank profitability in Europe”, paper presented at the European applied business research conference, Venice. June 9-13:57–67

  76. Sufian F (2009) Factors influencing bank profitability in a developing economy: Empirical evidence from Malaysia. Global Business Review, 10(2):225–241

  77. Trada N, Trabelsib M, Gouxc J (2017) Risk and profitability of Islamic banks: a religious deception or an alternative solution? Eur Res Manag Bus Econ 23:40–45

  78. Wasiuzzaman S, Tarmizi HBA (2010) “Profitability of Islamic banks in Malaysia: an empirical analysis”, Journal of Islamic Economics. Banking and Finance 6(4):53–68

  79. Yanikkaya H, Gumus N, Pabuccu Y (2018) How profitability differs between conventional and Islamic banks: a dynamic panel data approach. Pac Basin Financ J 48:99–111

  80. Zarrouk H, Jedidia K, Moualhi M (2016) Is Islamic bank profitability driven by same forces as conventional banks? Int J Islam Middle East Financ Manag 9(1):46–66

  81. Zhang X, Daly K (2013) The impact of Bank specific and macroeconomic factors on China’s Bank performance. Global Economy and Finance Journal 6(2):1–25

Download references

Author information

Correspondence to Nosheen.

Ethics declarations

Conflict of interest

The authors declare that they have no conflict of interest.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.



Governance Measures:

Governance, the industry-specific variable, is the average of following six measures.

  1. 1.

    Voice and accountability

Reflects perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and free media.

  1. 2.

    Political stability

Political stability and absence of violence/terrorism measures perceptions of the likelihood of political instability and/or politically motivated violence, including terrorism.

  1. 3.

    Government effectiveness

Reflects perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.

  1. 4.

    Regulatory quality

Reflects perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.

  1. 5.

    Rule of law

Reflects perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.

  1. 6.

    Control of corruption

Reflects perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.

About this article

Verify currency and authenticity via CrossMark

Cite this article

Nosheen, Rashid, A. Financial soundness of single versus dual banking system: explaining the role of Islamic banks. Port Econ J (2020). https://doi.org/10.1007/s10258-019-00171-2

Download citation


  • Financial stability
  • Islamic banks
  • Conventional banks
  • Dual banking system
  • Differential impact
  • System GMM

JEL classifications

  • G20
  • G21
  • Z12