Contribution of Islamic banks to systemic risk

Abstract

Abstract:This study aims to compare Islamic to conventional banks in order to examine their contribution to systemic risk. It examines listed banks from six Middle Eastern countries using the marginal expected shortfall (MES) method to measure dynamic individual systemic risk. We then try to determine the factors affecting these systemic risk levels for each type of bank. Finally, we refer to the panel VAR model estimated by GMM to determine the impact of the shock in each type of bank's effect on financial stability. The main results show that conventional banks present a significant systemic risk than Islamic banks. This result does not prove that Islamic banks do not present a real danger to the overall system's stability. On the contrary, they significantly contribute to systemic risk mainly during unstable periods. We conclude that market risk and bank size represent the main factors that positively affect systemic risk of Islamic banks.

Can trade credit rejuvenate Islamic banking?

“…The inefficiency of IBs is of utmost interest to academics, practitioners, and policymakers for the following reasons. First, IBs are interconnected with the global banking network, allowing them to transmit systemic risks 5 to the international financial system (Alandejani et al 2017 ; Chakroun and Gallali 2017 ). 6 Second, previous studies have consistently evidenced the poor risk management of large IBs, leading to even higher contagion risk to the economy (Čihák and Hesse 2010 ; Abedifar et al 2013 ).…”

“…However, since then, the Islamic banking industry has experienced exponential growth in its market share and connection with the global financial system (IFSB 2021 ). It is thus plausible that IBs can “transmit systemic risks” to other sectors or territories (Chakroun and Gallali 2017 ). Some examples of IBs’ collapses and distress across the world include Denmark’s Islamic International Bank (IIB) in 1985 and 1986 (Grais and Pellegrini 2006 ), the Islamic Bank Ltd (IBL) of South Africa in 1997 (Nathie 2010 ), Ihlas Finance House (IFH) of Turkey in 2001 (Ali 2007 ), and Muamalat Bank of Indonesia in 2015 (Maulia 2019 ).…”

Can Trade Credit Rejuvenate Islamic Banking?

“…The inefficiency of IBs is of utmost interest to academics, practitioners, and policymakers for the following reasons. First, IBs are interconnected with the global banking network, allowing them to transmit systemic risks 5 to the international financial system (Alandejani et al 2017;Chakroun and Gallali 2017). 6 Second, previous studies have consistently evidenced the poor risk management of large IBs, leading to even higher contagion risk to the economy (Čihák and Hesse 2010;Abedifar et al 2013).…”

“…However, since then, the Islamic banking industry has experienced exponential growth in its market share and connection with the global financial system (IFSB 2021). It is thus plausible that IBs can "transmit systemic risks" to other sectors or territories (Chakroun and Gallali 2017). Some examples of IBs' collapses and distress across the world include Denmark's Islamic International Bank (IIB) in 1985 and 1986 (Grais and Pellegrini 2006), the Islamic Bank Ltd (IBL) of South Africa in 1997 (Nathie 2010), Ihlas Finance House (IFH) of Turkey in 2001 (Ali 2007), and Muamalat Bank of Indonesia in 2015 (Maulia 2019).…”