Does Islamicity matter for the stability of Islamic banks in dual banking systems?

Abstract

Investigating the relation between the institutional environment and bank stability has become the focus of recent empirical works. Since its emergence, the Islamic segment of dual banking systems has expanded faster than the conventional segment, albeit growth remains somehow impeded due to many factors. In most countries, the business environment is centred on the principle of ''maximisation of owners' wealth'', which may have stripped Islamic banks of their intermediary function to pursue activities in greater congruence with the alfalah-Maqasid Sharia approach framework. This study examines whether Islamic banks are more stable in countries where the environment is overwhelmed by Islamicity than in countries with less Islamicity. A sample of Islamic and conventional banks from 14 Muslim majority countries is employed for the 2016–19 period. The results suggest that Islamicity has a neutral effect on bank stability and that Islamic banks do not find higher Islamicity of the environment a supporting factor for their resilience. Our findings reject the 'Islamicity-stability'' hypothesis for Islamic banks, suggesting that the Islamicity of the environment is irrelevant in dual banking systems. From a different angle, Islamic banks may seem to be a ''disguised'' version of conventional banks.

Keywords

• Islamic banks
• Stability
• Z-score
• Islamicity index