Islamic Banks and Financial Stability: An Empirical Analysis

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.The relative financial strength of Islamic banks is assessed empirically based on evidence covering individual Islamic and commercial banks in 18 banking systems with a substantial presence of Islamic banking. We find that (i) small Islamic banks tend to be financially stronger than small commercial banks; (ii) large commercial banks tend to be financially stronger than large Islamic banks; and (iii) small Islamic banks tend to be financially stronger than large Islamic banks, which may reflect challenges of credit risk management in large Islamic banks. We also find that the market share of Islamic banks does not have a significant impact on the financial strength of other banks. JEL Classification Numbers: G21

Banks and economic growth in developing countries: What about Islamic banks?

“…This is explained in large part, by the subprime crisis which affected the world economy. In fact, during this crisis, although IBs showed their performance, Bashir (2000), their profitability Bashir and Hameed (2003), and their stability Cihak and Hesse (2008), Čihák and Hesse (2010), some studies quote that IBs do not have any advantages in efficiency and stability (Kuran, 2004). The relative efficiency of those non-usurious banks is appreciated by the following studies (Abdul- Majid, Saal, & Battisti, 2010;Darrat et al, 2002;ElGamal & Inanoglu, 2005;Hassan, 2005;Sufian & Akbar Noor Mohamad Noor, 2009;Srairi (2010).…”

Business Model and Bank Risk in Indonesian Islamic Bank

“…We followed Gamaginta and Rokhim (2012) which has been developing models of Cihak and Hesse (2008), where UUS is a bank of its own, this is because the financial statements UUS that existed and has been separated. This study uses secondary data combined with frequency unbalanced panel of quarterly financial reports banks listed on the official website of Bank Indonesia and Financial Services Authority of Republic of Indonesia during the period December 2005 to June 2015.…”

“…Cihak and Hesse (2008) also made a comparison between the level of stability of banks for the large and small category, where the result shows that the large-sized Islamic banks have a higher risk than small Islamic banks. Furthermore, the studies that discuss the risk-taking behavior of Islamic banks also increased the risk by looking at the perspective of ownership structure, where is one of research as conducted by Srairi (2013) on the Middle East and North Africa.…”

“…The study of Islamic banking continues to grow from regulatory issues, supervision until the Islamic banking stability issues (Srairi, 2013) as conducted by Cihak and Hesse (2008), which stated that for the small category size, Islamic banks are more stable than conventional banks, while in the category of large, conventional banks are relatively more stable than Islamic banks. Cihak and Hesse (2008) also made a comparison between the level of stability of banks for the large and small category, where the result shows that the large-sized Islamic banks have a higher risk than small Islamic banks.…”

The Future Prospect for the Evolution of Islamic Banking in Turkey

“…Other risks appear as operational risks (El Qorchi, 2005) resulting from the lack of qualified personnel or even the risk of losing their assets due to their nature that is more or less associative. For some authors, Islamic finance does not have audit and risk management as a major concern (Gueranger, 2009), it would show a risk of default than to that of traditional finance (Cihak & Hesse, 2008).…”