[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/eee/ecosys/v42y2018i2p346-360.html
   My bibliography  Save this article

Financial stability of Islamic banking and the global financial crisis: Evidence from the Gulf Cooperation Council

Author

Listed:
  • Alqahtani, Faisal
  • Mayes, David G.
Abstract
Using a sample of 76 banks from the Gulf Cooperation Council region, we use accounting- as well as market-based measures of financial stability to examine whether Islamic banks outperformed conventional banks in the time of financial shocks during the period 2000–2013. We find that the difference between the two banking types was initially not significant during the GFC. However, when the financial shock spread to the real economy during the later phases of the crisis, Islamic banks suffered a significantly higher level of financial instability than conventional banks. This result holds true for large banks but not for small Islamic banks. Small Islamic banks demonstrated a relatively better handling of the economic downturn than large Islamic banks, supporting the argument that Islamic banks are more stable when they operate at a small scale but lose this stability when they increase their scale of operations. Hence, while Islamic banks may have escaped the consequences of highly volatile financial instruments, they were not spared from a major shock in the real economic sectors.

Suggested Citation

  • Alqahtani, Faisal & Mayes, David G., 2018. "Financial stability of Islamic banking and the global financial crisis: Evidence from the Gulf Cooperation Council," Economic Systems, Elsevier, vol. 42(2), pages 346-360.
    • Handle: RePEc:eee:ecosys:v:42:y:2018:i:2:p:346-360
    DOI: 10.1016/j.ecosys.2017.09.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0939362518302103
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ecosys.2017.09.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lepetit, Laetitia & Strobel, Frank, 2015. "Bank insolvency risk and Z-score measures: A refinement," Finance Research Letters, Elsevier, vol. 13(C), pages 214-224.
    2. Olson, Dennis & Zoubi, Taisier A., 2011. "Efficiency and bank profitability in MENA countries," Emerging Markets Review, Elsevier, vol. 12(2), pages 94-110, June.
    3. Sam R. Hakim, 2007. "Islamic Money Market Instruments," Chapters, in: M. Kabir Hassan & Mervyn K. Lewis (ed.), Handbook of Islamic Banking, chapter 11, Edward Elgar Publishing.
    4. Jennifer S. Crystal & B. Gerard Dages & Linda S. Goldberg, 2002. "Has foreign bank entry led to sounder banks in Latin America?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 8(Jan).
    5. Mariani Abdul-Majid & David Saal & Giuliana Battisti, 2010. "Efficiency in Islamic and conventional banking: an international comparison," Journal of Productivity Analysis, Springer, vol. 34(1), pages 25-43, August.
    6. Alqahtani, Faisal & Mayes, David G. & Brown, Kym, 2016. "Economic turmoil and Islamic banking: Evidence from the Gulf Cooperation Council," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 44-56.
    7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    8. Wassim RAJHI & Slim A. HASSAIRI, 2013. "Islamic Banks And Financial Stability: A Comparative Empirical Analysis Between Mena And Southeast Asian Countries," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 37, pages 149-177.
    9. Asli Demirgüč-Kunt & Luc Laeven & Ross Levine, 2004. "Regulations, market structure, institutions, and the cost of financial intermediation," Proceedings, Federal Reserve Bank of Cleveland, pages 593-626.
    10. Khawla Bourkhis & Mahmoud Sami Nabi, 2013. "Islamic and conventional banks' soundness during the 2007–2008 financial crisis," Review of Financial Economics, John Wiley & Sons, vol. 22(2), pages 68-77, April.
    11. Laeven, Luc & Levine, Ross, 2007. "Is there a diversification discount in financial conglomerates?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 331-367, August.
    12. M. Kabir Hassan & Mervyn K. Lewis (ed.), 2007. "Handbook of Islamic Banking," Books, Edward Elgar Publishing, number 3621.
    13. Richard A. Iley & Mervyn K. Lewis, 2013. "Global Finance After the Crisis," Books, Edward Elgar Publishing, number 15075.
    14. Asli Demirguk-Kunt & Thorsten Beck & Ouarda Merrouche, 2013. "Islamic Banking versus Conventional Banking: Business model, Efficiency, and Stability," Post-Print hal-01638080, HAL.
    15. Kabir, Md. Nurul & Worthington, Andrew & Gupta, Rakesh, 2015. "Comparative credit risk in Islamic and conventional bank," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 327-353.
    16. Aggarwal, Rajesh K & Yousef, Tarik, 2000. "Islamic Banks and Investment Financing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 93-120, February.
    17. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    18. Mohammed Najatullah Siddiqi, 2009. "Current Financial Crisis and Islamic Economics الأزمة المالية الحالية والاقتصاد الإسلامي," Chapters of books published by the Islamic Economics Institute, KAAU or its faculty members., in: Islamic Economics Institute (ed.),Issues in the International Financial Crisis from an Islamic Perspective-05 قضايا في الأزمة المالية العالمية من منظور إسلامي - 5, edition 1, chapter 1, pages 1-9, King Abdulaziz University, Islamic Economics Institute..
    19. Olson, Dennis & Zoubi, Taisier A., 2008. "Using accounting ratios to distinguish between Islamic and conventional banks in the GCC region," The International Journal of Accounting, Elsevier, vol. 43(1), pages 45-65, March.
    20. Agarwal, Vineet & Taffler, Richard, 2008. "Comparing the performance of market-based and accounting-based bankruptcy prediction models," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1541-1551, August.
    21. M. Fahim Khan, 2009. "World Financial Crisis: Lesson form Islamic Economics الأزمة المالية العالمية: الدرس شكل الاقتصاد الإسلامي," Chapters of books published by the Islamic Economics Institute, KAAU or its faculty members., in: Islamic Economics Institute (ed.),Issues in the International Financial Crisis from an Islamic Perspective-05 قضايا في الأزمة المالية العالمية من منظور إسلامي, edition 1, chapter 3, pages 19-24, King Abdulaziz University, Islamic Economics Institute..
    22. Serge Jeanneau & Marian Micu, 2002. "International bank lending to emerging market countries: explaining the 1990s roller coaster," BIS Quarterly Review, Bank for International Settlements, March.
    23. Samir Srairi, 2010. "Cost and profit efficiency of conventional and Islamic banks in GCC countries," Journal of Productivity Analysis, Springer, vol. 34(1), pages 45-62, August.
    24. Mr. Martin Cihak & Mr. Heiko Hesse, 2007. "Cooperative Banks and Financial Stability," IMF Working Papers 2007/002, International Monetary Fund.
    25. Pejman Abedifar & Philip Molyneux & Amine Tarazi, 2013. "Risk in Islamic Banking," Review of Finance, European Finance Association, vol. 17(6), pages 2035-2096.
    26. Mohammad Ashraful Ferdous Chowdhury & Md. Mahmudul Haque & Mansur Masih, 2017. "Re-Examining the Determinants of Islamic Bank Performance: New Evidence from Dynamic GMM, Quantile Regression, and Wavelet Coherence Approaches," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(7), pages 1519-1534, July.
    27. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    28. Beck, Thorsten & Demirgüç-Kunt, Asli & Merrouche, Ouarda, 2013. "Islamic vs. conventional banking: Business model, efficiency and stability," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 433-447.
    29. Patrick Imam & Kangni Kpodar, 2013. "Islamic Banking: How Has It Expanded?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(6), pages 112-137, November.
    30. Martin Čihák & Heiko Hesse, 2010. "Islamic Banks and Financial Stability: An Empirical Analysis," Journal of Financial Services Research, Springer;Western Finance Association, vol. 38(2), pages 95-113, December.
    31. Kym Brown & M. Kabir Hassan & Michael Skully, 2007. "Operational Efficiency and Performance of Islamic Banks," Chapters, in: M. Kabir Hassan & Mervyn K. Lewis (ed.), Handbook of Islamic Banking, chapter 7, Edward Elgar Publishing.
    32. Laeven, Luc & Levine, Ross, 2009. "Bank governance, regulation and risk taking," Journal of Financial Economics, Elsevier, vol. 93(2), pages 259-275, August.
    33. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    34. Serge Jeanneau & Marian Micu, 2002. "Determinants of international bank lending to emerging market countries," BIS Working Papers 112, Bank for International Settlements.
    35. Maghyereh, Aktham I. & Awartani, Basel, 2014. "Bank distress prediction: Empirical evidence from the Gulf Cooperation Council countries," Research in International Business and Finance, Elsevier, vol. 30(C), pages 126-147.
    36. Boyd, John H. & Runkle, David E., 1993. "Size and performance of banking firms : Testing the predictions of theory," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 47-67, February.
    37. Osamah M. Al-Khazali & Guillaume Leduc & Mohammad Saleh Alsayed, 2016. "A Market Efficiency Comparison of Islamic and Non-Islamic Stock Indices," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(7), pages 1587-1605, July.
    38. de Haas, Ralph & van Lelyveld, Iman, 2006. "Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1927-1952, July.
    39. Rosman, Romzie & Wahab, Norazlina Abd & Zainol, Zairy, 2014. "Efficiency of Islamic banks during the financial crisis: An analysis of Middle Eastern and Asian countries," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 76-90.
    40. Sirajo Aliyu & M. Kabir Hassan & Rosylin Mohd Yusof & Nasri Naiimi, 2017. "Islamic Banking Sustainability: A Review of Literature and Directions for Future Research," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(2), pages 440-470, February.
    41. Bashir, Abdel-Hameed M., 2003. "Determinants Of Profitability In Islamic Banks: Some Evidence From The Middle East," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 11, pages 32-57.
    42. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    43. Cara S. Lown & Carol L. Osler & Philip E. Strahan & Amir Sufi, 2000. "The changing landscape of the financial services industry: what lies ahead?," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 39-54.
    44. Mohammad Umer Chapra, 2009. "The Global Financial Crisis: Can Islamic Finance Help? الأزمة المالية العالمية: هل يساعد التمويل الإسلامي؟," Chapters of books published by the Islamic Economics Institute, KAAU or its faculty members., in: Islamic Economics Institute (ed.),Issues in the International Financial Crisis from an Islamic Perspective-05 قضايا في الأزمة المالية العالمية من منظور إسلامي, edition 1, chapter 2, pages 11-18, King Abdulaziz University, Islamic Economics Institute..
    45. Mr. Rupert D Worrell & Andrea M. Maechler & Ms. Srobona Mitra, 2007. "Decomposing Financial Risks and Vulnerabilities in Eastern Europe," IMF Working Papers 2007/248, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Neifar, Malika, 2020. "Interest-free versus Conventional banks- A Comparative Study using Linear and Nonlinear Panel Regression: Empirical Evidence from Turky and 6 MENA countries," MPRA Paper 101028, University Library of Munich, Germany.
    2. Neifar, Malika, 2020. "Different dimensions Bank performance comparisons IBs vs CBs – Quatar case," MPRA Paper 101375, University Library of Munich, Germany.
    3. Neifar, Malika, 2020. "Long run comparison analysis and Short run Stability sensitivity: Empirical Evidence from Tunisian Banks," MPRA Paper 101029, University Library of Munich, Germany.
    4. Boulanouar, Zakaria & Alqahtani, Faisal & Hamdi, Besma, 2021. "Bank ownership, institutional quality and financial stability: evidence from the GCC region," Pacific-Basin Finance Journal, Elsevier, vol. 66(C).
    5. Abuzayed, Bana & Al-Fayoumi, Nedal & Molyneux, Phil, 2018. "Diversification and bank stability in the GCC," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 17-43.
    6. Hassan, M. Kabir & Aliyu, Sirajo, 2018. "A contemporary survey of islamic banking literature," Journal of Financial Stability, Elsevier, vol. 34(C), pages 12-43.
    7. Louhichi, Awatef & Louati, Salma & Boujelbene, Younes, 2020. "The regulations–risk taking nexus under competitive pressure: What about the Islamic banking system?," Research in International Business and Finance, Elsevier, vol. 51(C).
    8. Alqahtani, Faisal & Mayes, David G. & Brown, Kym, 2017. "Reprint of Economic turmoil and Islamic banking: Evidence from the Gulf Cooperation Council," Pacific-Basin Finance Journal, Elsevier, vol. 42(C), pages 113-125.
    9. Alqahtani, Faisal & Mayes, David G. & Brown, Kym, 2016. "Economic turmoil and Islamic banking: Evidence from the Gulf Cooperation Council," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 44-56.
    10. Asmild, Mette & Kronborg, Dorte & Mahbub, Tasmina & Matthews, Kent, 2019. "The efficiency patterns of Islamic banks during the global financial crisis: The case of Bangladesh," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 67-74.
    11. Saida Daly & Mohamed Frikha, 2016. "Banks and economic growth in developing countries: What about Islamic banks?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1168728-116, December.
    12. Saeed, Momna & Izzeldin, Marwan, 2016. "Examining the relationship between default risk and efficiency in Islamic and conventional banks," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 127-154.
    13. Saeed, Momna & Izzeldin, Marwan & Hassan, M. Kabir & Pappas, Vasileios, 2020. "The inter-temporal relationship between risk, capital and efficiency: The case of Islamic and conventional banks," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    14. Mollah, Sabur & Zaman, Mahbub, 2015. "Shari’ah supervision, corporate governance and performance: Conventional vs. Islamic banks," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 418-435.
    15. Mohamed Ali Trabelsi & Naama Trad, 2017. "Profitability and risk in interest-free banking industries: a dynamic panel data analysis," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 10(4), pages 454-469, October.
    16. Olson, Dennis & Zoubi, Taisier, 2017. "Convergence in bank performance for commercial and Islamic banks during and after the Global Financial Crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 71-87.
    17. Safiullah, Md & Shamsuddin, Abul, 2018. "Risk in Islamic banking and corporate governance," Pacific-Basin Finance Journal, Elsevier, vol. 47(C), pages 129-149.
    18. Khediri, Karim Ben & Charfeddine, Lanouar & Youssef, Slah Ben, 2015. "Islamic versus conventional banks in the GCC countries: A comparative study using classification techniques," Research in International Business and Finance, Elsevier, vol. 33(C), pages 75-98.
    19. Bitar, Mohammad & Hassan, M. Kabir & Walker, Thomas, 2017. "Political systems and the financial soundness of Islamic banks," Journal of Financial Stability, Elsevier, vol. 31(C), pages 18-44.
    20. Salma Louati & Younes Boujelbene, 2021. "Basel Regulations and Banks’ Risk-efficiency Nexus: Evidence from Dynamic Simultaneous-equation Models," Journal of African Business, Taylor & Francis Journals, vol. 22(4), pages 578-602, October.

    More about this item

    Keywords

    Financial stability; Global financial crisis (GFC); Gulf Cooperation Council (GCC); Islamic banking; Distance to default; Z score;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecosys:v:42:y:2018:i:2:p:346-360. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://edirc.repec.org/data/osteide.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.