Political Systems and the Financial Soundness of Islamic Banks

56 Pages Posted: 3 Nov 2018

See all articles by M. Kabir Hassan

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Mohammad Bitar

Nottingham University Business School; University of Nottingham

Thomas John Walker

Concordia University, Quebec - Department of Finance

Date Written: June 1, 2017

Abstract

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

Suggested Citation

Hassan, M. Kabir and Bitar, Mohammad and Walker, Thomas John, Political Systems and the Financial Soundness of Islamic Banks (June 1, 2017). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3263349

M. Kabir Hassan (Contact Author)

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Mohammad Bitar

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

University of Nottingham ( email )

Nottingham, Québec
Canada

Thomas John Walker

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada

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