Economic Uncertainty and Bank Stability: Conventional vs. Islamic Banking

Abstract

In this paper, we explore whether economic uncertainty differently affects the default risk of Islamic and conventional banks. Using a sample of 568 banks from 20 countries between 2009 and 2018, we take advantage of the World Uncertainty Index (WUI) proposed by Ahir et al. (2018) to conduct a study based on a comparable measure across countries. Our findings indicate that, while economic uncertainty increases the default risk of conventional banks, Islamic banks' default risk is not affected. To shed light on why economic uncertainty differently influences the default risk of Islamic and conventional banks, we explore the influence of religiosity, institutional factors and bank-level heterogeneity. We observe that Islamic banks' default risk is immune to uncertainty in all types of countries but that such a difference with conventional banks mainly holds for banks with higher non-interest income and larger size, and for banks which are publicly traded. Moreover, our findings show that conventional banks suffer more from uncertainty in terms of stability in countries with higher religiosity. Our results are robust to alternative estimation techniques to deal with endogeneity and to alternative variable measurements.

Beyond the Crisis: Tracking SME Non-Performing Loan in Indonesia Before and After the COVID-19 Stimulus

“…Additionally, the sectors financed by Islamic banks may have been disproportionately affected by the pandemic, exacerbating the impact on non-performing financing \ (Khoirotunnisa & Zulfikar, 2022). Islamic banks' operational risk, including legal and Sharia compliance risks, may pose additional challenges compared to conventional banks, impacting their ability to navigate economic shocks effectively (Bilgin et al, 2020). The study by (Rashid et al, 2017) suggests that Islamic banks have performed better than conventional banks in contributing to financial stability, indicating a potential resilience in the face of crises (Rashid et al, 2017).…”

Financial stability in Indonesian Islamic banking using Z-Score: Before and during Covid-19

“…In contrast, the financial stability ratio is FDR 0.045, Bank Size is 0.001, and BI Rate is 0.001 <0.05, so it can be concluded that the null hypothesis cannot be accepted. Z-Score as a financial stability variable proved to have no average difference between before the Covid-19 pandemic and during the Covid-19 pandemic (referring to table 2), but there was a difference in the mean value of Z-Score before the Covid-19 pandemic higher than the mean value of Z-Score during the Covid-19 pandemic (referring to table 1), the position of both above the number 2675 so that it is still safe from the threshold of bankruptcy (Michael, With these results, it is understood that the level of likelihood of insolvency before the pandemic is more minor than during a pandemic and can be interpreted even though Islamic banks are resistant to crises both in principle and practice (Bilgin et al, 2020), but regulators must still pay specific attention if there is a problem because it affects stability (Lasty et al, 2019;Michael, 2017). In more sophisticated business developments, Z-Score can effectively identify indications of danger (Chiaramonte et al, 2015).…”

“…The findings of Nugroho & Qizam (2014) show that Islamic banks remained stable with an increasing trend during the crisis compared to conventional banks. Bilgin et al (2020) found that global economic uncertainty can increase the risk of failure. It was found that Islamic banks are immune to economic uncertainty.…”