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A net stable funding ratio for Islamic banks and its impact on financial stability: An international investigation

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  • Ashraf, Dawood
  • Rizwan, Muhammad Suhail
  • L’Huillier, Barbara

Abstract

The Islamic Financial Services Board (IFSB) is the standard setting body for the Islamic banking industry. The IFSB, while endorsing the Basel III accord, modified the criteria to calculate the Net Stable Funding Ratio (NSFR) to cater for the unique aspects of the Islamic banking industry. In this paper, we calculated the modified NSFR of 136 Islamic banks from 30 jurisdictions between 2000 and 2013 and explored the potential impact the requirements of this ratio has on the financial stability of Islamic banks after controlling for bank, country, and market-specific variables. The empirical findings suggest that the modified NSFR has a positive impact on the financial stability of Islamic banks during the sample period. However, the marginal impact of the NSFR on stability diminishes as the size of the bank increases. The results remained robust after applying an alternative measure of stability and using an alternative estimation model based on an instrumental variable approach. These results validate the use of the IFSB’s modified NSFR for Islamic banks as a regulatory measure.

Suggested Citation

  • Ashraf, Dawood & Rizwan, Muhammad Suhail & L’Huillier, Barbara, 2016. "A net stable funding ratio for Islamic banks and its impact on financial stability: An international investigation," Journal of Financial Stability, Elsevier, vol. 25(C), pages 47-57.
  • Handle: RePEc:eee:finsta:v:25:y:2016:i:c:p:47-57
    DOI: 10.1016/j.jfs.2016.06.010
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    4. Sorwar, Ghulam & Pappas, Vasileios & Pereira, John & Nurullah, Mohamed, 2016. "To debt or not to debt: Are Islamic banks less risky than conventional banks?," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 113-126.
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    6. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.
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    8. Trad, Naama & Trabelsi, Mohamed Ali & Goux, Jean François, 2017. "Risk And Profi Tability Of Islamic Banks: A Religious Deception Or An Alternative Solution?," European Research on Management and Business Economics (ERMBE), Academia Europea de Dirección y Economía de la Empresa (AEDEM), vol. 23(1), pages 40-45.
    9. repec:hur:ijarbs:v:7:y:2017:i:12:p:1145-1155 is not listed on IDEAS
    10. Mohamed Ali Trabelsi & Naama Trad, 2017. "Profitability and risk in interest-free banking industries: a dynamic panel data analysis," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 10(4), pages 454-469, November.
    11. repec:eee:finsta:v:31:y:2017:i:c:p:18-44 is not listed on IDEAS
    12. Ghassan, Hassan B. & Krichene, Noureddine, 2017. "Financial Stability of Conventional and Islamic Banks: A Survey," MPRA Paper 82372, University Library of Munich, Germany.

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