Does Islamic banking really strengthen financial stability? Empirical evidence from Pakistan

Abstract

Purpose This paper aims to empirically assess the contribution of Islamic banks toward the financial stability of Pakistan. For this, the authors investigate the relative financial strength of Islamic banks and their contribution toward the financial stability. They also examine the relationship between the competitive conduct of banks and banking system stability. Design/methodology/approach The authors use quarterly data of ten conventional banks, four full-fledged Islamic banks and six standalone Islamic branches of conventional banks of Pakistan for the period 2006-2012. The z-score has been computed and used as the measure of stability of banks and the random effects estimator applied to quantify the impact of bank-specific variables and macroeconomic indicators on the financial stability. The empirical framework used in the paper enables the authors us to examine the differential effect of each underlying variable on the financial stability across Islamic and conventional banks. To check the robustness of the results, the authors have estimated several models with different specifications. Findings The regression results indicate that income diversity, profitability ratio, loan to asset ratio, asset size and the market concentration ratio of banks have significant effects on the stability of banks. Comparing Islamic and conventional banks, notable differential effects of the empirical determinants of financial stability for Islamic and conventional banks have been observed. The results suggest that Islamic banks have performed better as compared to conventional banks and contributed more effectively in the stability of financial sector. Overall, the results depict that the contribution of Islamic banks toward the financial stability has been reasonable and prospective. Practical implications The empirical results of the paper are very useful not only for banks’ managements but also for the investors, bank customers and policymakers. Specifically, the findings help in enhancing our understanding as to how the bank-specific variables and macroeconomic indicators are related to the financial stability of the banking system. The results also help understand the role of both Islamic and conventional banks in the financial stability. Further, the results suggest that the financial soundness can be enhanced by creating healthy competition in the banking industry. The results about macroeconomic indicators imply that protective measures are required to intensify (mitigate) the positive (negative) effect of gross domestic product (inflation) on banks’ financial stability. Originality/value This paper provides an overall comparative analysis of financial stability of both Islamic and conventional banks of Pakistan. First, the paper computes the z-score for each bank included in the sample, and then, it performs the regression analysis to study how bank-specific variables and macroeconomic factors are related to the financial stability of banks. Unlike the previous studies, our empirical framework enables the authors to examine the differential effect of each underlying variable on the financial stability across Islamic and conventional banks.

Role of Financial Inclusion to Stability: The Case of Indonesia’s Sharia Banking

“…The following is a general overview of financing data and NPF of sharia banking Indonesia 2011-2016: After the regression test with 5% significance using eviews, it showed that the financing of MSMEs as a proxy for financial inclusion has no effect on the financial stability of Sharia banking, but contrastly deposits has positive effect. This result support the finding of Rashid et al (2017) that Sharia banks income does not solely depend on lending and rely on different source of income that positively contribute to improving the financial stability of those Sharia banks. Hypothesis testing that has been done shows financial inclusion proxies by deposits have positive effect on Sharia banking stability of while proxy financing of MSMEs has no effect.…”

“…The role of Islamic or Sharia banking in promoting financial system stability is an important issue. There are some evidence that Islamic or Sharia banks contribute positively to the financial stability of banking sector and in turn, to the economy (Rashid et al, 2017;Borkhis&Nabi, 2013). However, the said impact has not been well researched in case of Sharia banking in Indonesia.…”

Are Islamic Banks Really Different from Conventional Banks? An Investigation using Classification Techniques

“…Rashid and Rehman (2016) measuring and decomposing the total factor productivity and efficiency of banks in Pakistan indicated that the total factor productivity of conventional banks was higher than that of Islamic banks. Rashid, Yousaf, and Khaleequzzaman (2017) examined the role of Islamic banks in the financial stability of financial sector of Pakistan. They found that compared to conventional banks, Islamic banks were better and more effectively contributing in the stability of financial sector.…”

Risiko Kredit, Stabilitas, dan Kebijakan Pembiayaan Bank Syariah di Indonesia

“…Hasil pengujian korelasi dengan meniadakan variabel kontrol didapatkan bahwa tingkat stabilitas berkorelasi positif dan signifikan dengan financing to deposit ratio (FDR) dengan nilai koefisien 0,268. Semakin tinggi nilai z-score, maka semakin stabil keuangan bank dan jauh dari kegagalan finansial dan akan meningkatkan rasio pembiayaan, hasil ini mirip dengan hasil studi yang dilakukan oleh Rashid et al, (2017) yang menyatakan bahwa ada hubungan antara loan (kredit) dengan stabilitas. Namun stabilitas tidak memiliki hubungan yang signifikan dengan akad pembiayaan murabahah.…”