Are Islamic Banks More Resilient During Financial Panics?

30 Pages Posted: 26 Mar 2015

See all articles by Moazzam Farooq

Moazzam Farooq

Central Bank of Oman; Tilburg University - CentER, European Banking Center (EBC); IQRA University

Sajjad Zaheer

State Bank of Pakistan - Monetary Policy Department

Multiple version iconThere are 2 versions of this paper

Date Written: February 2015

Abstract

Rapid growth of Islamic banking in developing countries is accompanied with claims about its relative resilience to financial crises as compared to conventional banking. However, little empirical evidence is available to support such claims. Using data from Pakistan, where Islamic and conventional banks co-exist, we compare these banks during a financial panic. Our results show that Islamic bank branches are less prone to deposit withdrawals during financial panics, both unconditionally and after controlling for bank characteristics. The Islamic branches of banks that have both Islamic and conventional operations tend to attract (rather than lose) deposits during panics, which suggests a role for religious branding. We also find that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. Our findings suggest that greater financial inclusion of faith-based groups may enhance the stability of the banking system.

Keywords: Islamic banking, Pakistan, Commercial banks, Banking crisis, Bank deposits, Loans, Bank liquidity, Bank capitalization, Balance sheets, Financial panic, Liquidity crisis, Bank Run, credit, lending, equity

JEL Classification: D22, G01, G21, P42

Suggested Citation

Farooq, Moazzam and Zaheer, Sajjad, Are Islamic Banks More Resilient During Financial Panics? (February 2015). IMF Working Paper No. 15/41. Available at SSRN: https://ssrn.com/abstract=2585387

Moazzam Farooq (Contact Author)

Central Bank of Oman ( email )

P.O. Box 1161
Postal Code 112,Ruwi
Oman

Tilburg University - CentER, European Banking Center (EBC) ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

IQRA University ( email )

Defence View
Shaheed-e-Millat Road (Ext.)
Karachi, Sindh 75500
Pakistan

Sajjad Zaheer

State Bank of Pakistan - Monetary Policy Department ( email )

I.I. Chundrigar Road
Karachi, 74000
Pakistan

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