Islamic Banks and Financial Stability: Further Evidence
43 Pages Posted: 2 May 2011 Last revised: 9 Oct 2018
Date Written: May 2, 2009
The objectives of this paper is to assess whether there is any overall differences in the level of financial stability of Islamic banks as compared to conventional banks and whether such differences (if any) are linked to certain contractual constraints faced by Islamic banks (with the z-score as a proxy for financial stability). In particular, the phenomenon of profit distribution, the level of fixed rate asset concentration, the level of profit sharing and the existence of discretionary reserves are proposed as key factors associated with the level of financial stability. The results provide mixed support for these assertions. The negative association between profit distribution management and financial stability is inconclusive. However, fixed rate asset concentration is almost invariably associated with lower financial stability, while there is some support for a negative association between profit and loss asset concentration and financial stability. Discretionary reserves are associated with lower financial stability, in contrast to the proposed relationship. The results found in this study tend to be stronger for smaller banks.
Keywords: financial stability, Islamic banking, banking, Islamic finance, z-score
JEL Classification: G2, P4, Z1
Suggested Citation: Suggested Citation