Liquidity Creation Performance and Financial Stability Consequences of Islamic Banking: Evidence from a Multinational Study
55 Pages Posted: 11 Nov 2018 Last revised: 8 May 2019
Date Written: April 10, 2019
Despite the growth of Islamic banks (IBs), little is known about their liquidity creation performance and financial stability consequences relative to conventional banks (CBs). We address these issues using data from 24 countries over 2000–2014. We find IBs create more liquidity per unit of assets than CBs, primarily on the asset side of the balance sheet. Results are economically significant, econometrically robust, hold in high- and low-income countries, and during the Global Financial Crisis and other times. In addition, CB liquidity creation results in reduced national financial stability, particularly in high-income countries, whereas IB liquidity creation does not.
Keywords: Islamic Banks; Bank Liquidity Creation; Financial Stability
JEL Classification: G15, G21, G28
Suggested Citation: Suggested Citation