Financial stability of Islamic and conventional banks

Abstract: This paper examines the stability of Islamic banks and conventional banks during and after the recent global crisis by determining the impact of the crisis on the banks’ stability. This was accomplished by measuring the z-score (the stability measure) for both types, with 96 observations of 12 banks in 4 countries where both types of banks have significant market share. This analysis suggests that Islamic banks performed differently during the last financial crisis, but that conventional banks are more stable overall. Islamic laws prevent Islamic banks to get affected in the first stages of the crisis because those laws encourage banks to invest in real assets, but the banks were affected by the subsequent stages, which indicates the relationship between Islamic banks and the real economy. Panel data was used as an econometrics technique and determined a negative relationship between stability and the leverage.