Political Systems and the Financial Soundness of Islamic Banks
56 Pages Posted: 3 Nov 2018
Date Written: June 1, 2017
We investigate whether and how political systems affect the financial soundness of conventional and Islamic banks. Using factors extracted from principal component analysis, we find that Islamic banks underperform their conventional counterparts in more democratic political systems but outperform them in hybrid and Sharia’a-based legal systems. The findings reflect the challenges Islamic banks face in Western countries in terms of perception, financial infrastructure, and regulatory constraints while mirroring the recognition of their specificities and their cultural and religious compliance with Sharia’a law in Muslim countries. The findings are robust to a battery of alternative estimation techniques and methods of correcting standard errors.
Keywords: Islamic banks, financial soundness, democracy, legal systems
JEL Classification: C38, G01, G21, P5, Z12
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