The impact of a dual banking system on macroeconomic efficiency

Ahmed Hunjra (), Faridul Islam, Peter Verhoeven and M. Kabir Hassan

Research in International Business and Finance, 2022, vol. 61, issue C

Abstract: The rapid growth of Islamic banking around the globe has led to questions about its role in the economy. In this paper, we examine whether Islamic banking acts as a substitute or complement to conventional banking in promoting macroeconomic efficiency in countries with a dual-banking system. Using a one-stage Stochastic Frontier (SF) approach, we find evidence that similar to conventional banking, Islamic banking positively contributes to a country's macroeconomic efficiency. However, Islamic banking acts as a substitute not as a complement to conventional banking in contributing to macroeconomic efficiency. The results are robust to using both credit and deposit ratios as proxies of financial development. The findings are consistent with growing evidence that despite the apparent philosophical differences between the two banking systems, Islamic banking is increasingly converging in its operations to conventional banking.

Keywords: Macroeconomic efficiency; Stochastic frontier analysis; Islamic banking; Conventional banking; Dual banking (search for similar items in EconPapers)
JEL-codes: C10 E02 E23 E29 G21 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:61:y:2022:i:c:s0275531922000356

DOI: 10.1016/j.ribaf.2022.101647

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