Economic Turmoil and Islamic Banking: Evidence from the Gulf Cooperation Council

Posted: 17 Dec 2014 Last revised: 23 Aug 2016

See all articles by Faisal Alqahtani

Faisal Alqahtani

University of Auckland; Taibah University

David G. Mayes

University of Auckland Business School (Deceased)

Kym Brown

Monash Business School, Monash University; Financial Research Network (FIRN)

Date Written: May 17, 2016

Abstract

In this paper, we empirically test if Islamic banks outperformed conventional banks in absorbing large financial shocks during the recent global financial crisis (GFC). Using the CAMEL model on a sample of 101 banks across six Gulf Cooperation Council (GCC) economies, from 1998 to 2012, we find that Islamic banks outperformed conventional banks during the GFC in terms of capitalisation, profitability and liquidity. This changed when the financial shocks spilled over from the financial sector into segments of the real economy in the later stages of financial turmoil, Islamic banks suffered even more than conventional banks, and lost their advantage in capitalisation, performing poorer than conventional banks in terms of profitability and efficiency. This finding suggests that Islamic banks are more vulnerable to conditions of real economic sectors, whereas conventional banks are more vulnerable to global financial shocks.

Keywords: Islamic banking, Global financial crisis (GFC), Gulf Cooperation Council (GCC), Operating performance

JEL Classification: G24, D12, P17, P34, C23, B21

Suggested Citation

Alqahtani, Faisal and Mayes, David G. and Brown, Kym, Economic Turmoil and Islamic Banking: Evidence from the Gulf Cooperation Council (May 17, 2016). Pacific-Basin Finance Journal, Vol. 39, 2016, Available at SSRN: https://ssrn.com/abstract=2539000

Faisal Alqahtani (Contact Author)

University of Auckland ( email )

Auckland
New Zealand

Taibah University ( email )

Prince Naif Ibn Abdulaziz, Tayba, Medina Saudi Ara
Mediana, Madinah
Saudi Arabia

David G. Mayes

University of Auckland Business School (Deceased)

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Kym Brown

Monash Business School, Monash University ( email )

P.O. Box 197
Caulfield East, Victoria 3800
Australia
61 3 9903 1053 (Phone)
61 3 9903 2422 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: www.firn.org.au

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