FINANCIAL STABILITY OF ISLAMIC AND CONVENTIONAL BANKS IN BANGLADESH: REVISITING STABILITY MEASURES AND ANALYZING STABILITY BEHAVIOR
This study intends to assess the relative financial stability of Islamic banks in Bangladesh using three different Z-Scores as financial stability measures, based on a sample of 29 listed commercial banks (23 conventional and 6 Islamic) in Bangladesh over the period 2005-2016. Apart from the existing measure of financial stability, Z-Score, the paper contributes to the literature by developing an alternative Z-Score based on bank’s loan portfolio infection ratio. We first use pair-wise comparison and find that Islamic banks are financially more stable in two stability measures i.e. Z-Score (based on Capital Adequacy Ratio) and Z-Score (based on Infection Ratio). We then perform static (random effects) and dynamic (GMM) panel data analysis. By controlling for bank-specific, industry-specific and macroeconomic variables in the regressions, we find that Islamic banks are financially more stable in 2 panel regressions of Z-Score (based on Infection Ratio). We also find that the presence of Islamic banks increases the stability of all banks in the system including their conventional peers.
Allen, W. A., & Wood, G. (2006). Defining and achieving financial stability. Journal of Financial Stability, 2(2), 152–172.
Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking and Finance, 37(2), 433–447.
Bourkhis, K., & Nabi, M. S. (2013). Islamic and conventional banks’ soundness during the 2007-2008 financial crisis. Review of Financial Economics, 22(2), 68–77.
Boyd, J. H., & Runkle, D. E. (1993). Size and performance of banking firms. Testing the predictions of theory. Journal of Monetary Economics, 31(1), 47–67.
Chong, B. S., & Liu, M. H. (2009). Islamic banking: Interest-free or interest-based? Pacific Basin Finance Journal.
Čihák, M., & Hesse, H. (2010). Islamic Banks and Financial Stability: An Empirical Analysis. Journal of Financial Services Research, 38(2), 95–113.
European Central Bank. (2015). Financial Stability Review, November 2015. Retrieved from https://www.ecb.europa.eu/pub/pdf/other/financialstabilityreview201511.en.pdf
Farook, S., Hassan, M. K., & Clinch, G. (2015). Islamic banks and Financial Stability: Further Evidence, 1–43.
Hassan, T., Mohamad, S., & Khaled I. Bader, M. (2009). Efficiency of conventional versus Islamic banks: evidence from the Middle East. International Journal of Islamic and Middle Eastern Finance and Management, 2(1), 46–65.
Jobst, A. a. (2008). Derivatives in Islamic Finance. Islamic Capital Markets Products, Regulation & Development.
Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics.
Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking and Finance.
Maechler, A., Mitra, S., & Worrel, D. (2005). Exploring Financial Risks and Vulnerabilities in New and Potential EU Member States, (June 2016).
Rajhi, W., & Hassairi, S. A. (2013). Islamic Banks and Financial Stability: A Comparative Empirical Analysis Between MENA and Southeast Asian Countries. Région et Développement, 37, 1–31.
Rozzani, N., & Rahman, R. A. (2013). Determinants of Bank Efficiency: Conventional versus Islamic. International Journal of Business and Management, 8(14), 98–110.
Schaeck, K., Čihák, M., & Wolfe, S. (2009). Are More Competitive Banking Systems More Stable? Retrieved from https://www.imf.org/external/pubs/ft/wp/2006/wp06143.pdf
Uddin, A., Chowdhury, M. A. F., & Islam, M. N. (2017). Resiliency between Islamic and conventional banks in Bangladesh: Dynamic GMM and quantile regression approaches. International Journal of Islamic and Middle Eastern Finance and Management.
Van Greuning, H., & Iqbal, Z. (2008). Risk analysis for Islamic banks. World Bank Publications.
Journal of Islamic Monetary Economics and Finance is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.