Economic uncertainty and bank stability: Conventional vs. Islamic banking

Mehmet Bilgin, Gamze Ozturk Danisman, Ender Demir and Amine Tarazi

Journal of Financial Stability, 2021, vol. 56, issue C

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 use the World Uncertainty Index (WUI) by Ahir et al. (2018) to conduct a study based on a comparable measure across countries. Our findings indicate that economic uncertainty increases the default risk of conventional banks but does not affect Islamic banks’ default risk. To understand why, we explore the influence of religiosity, institutional factors, and bank-level heterogeneity. We observe that Islamic banks’ default risk is not significantly affected by uncertainty in all types of countries, but such a difference with conventional banks mainly holds for banks with higher income diversification, larger size, and that are publicly traded. Moreover, our findings show that conventional banks suffer more from uncertainty in terms of stability in countries with higher religiosity and with a higher share of profit-loss sharing (PLS) contracts. Our results are robust to alternative estimation techniques to deal with endogeneity and to alternative variable measurements.

Keywords: Islamic banks; Conventional banks; Economic uncertainty; Bank stability; World uncertainty index (search for similar items in EconPapers)
JEL-codes: D81 G01 G21 G28 G32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Related works:
Working Paper: Economic uncertainty and bank stability: Conventional vs. Islamic banking (2021)
Working Paper: Economic uncertainty and bank stability: Conventional vs. Islamic banking (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:56:y:2021:i:c:s157230892100070x

DOI: 10.1016/j.jfs.2021.100911

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