Financial Stability of Conventional and Islamic Banks: Empirical Evidence

Abstract

The aim of this paper is to study the stability of Islamic banks vs. conventional banks. Unlike previous works on this topic, we used profitability, solvency, productivity, investment and risk indicators, as well as macroeconomic indicators. Likewise, we used effectiveness and efficiency indicators, determined via the SFA and DEA method respectively.

The banks in our sample were selected based on their contribution to the total assets of both types of finance. This selection method allowed us to have a global idea on the effectiveness, efficiency, risk and stability of the two banking sectors.

This empirical investigation revealed that Sharia-compatible banks are more efficient than conventional banks. In contrast, Islamic banks are less efficient and riskier than conventional banks. They lose on average 5.795% and 3.9413% of their assets, respectively, as credit risk and operational risk. In terms of market risk, Islamic banks are less risky than conventional banks. They lost 3,214% of their assets over the 2004-2014 period, compared with 4,119% for conventional banks.

All in all, the two types of institutions were able to resist the crisis despite the slight reduction in activity and the minimal decrease in their stability scores due to the decline in activity and the prudent policy they adopted.