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Islamic and conventional banks' soundness during the 2007–2008 financial crisis

  • Bourkhis, Khawla
  • Nabi, Mahmoud Sami

The recent global financial crisis has induced a series of failure of many conventional banks and led to an increased interest in the Islamic banking business model. This paper attempts to answer empirically the following question: What was the effect of the 2007–2008 financial crisis on the soundness of Islamic banks and their conventional peers? Using the Z-score as an indicator of bank stability, our regression analysis (covering a matched sample of 34 Islamic Banks (IBs) and 34 conventional banks (CBs) from 16 countries) shows that there is no significant difference in terms of the effect of the financial crisis on the soundness of IBs and CBs. This finding reveals that IBs are diverging from their theoretical business model which would have allowed them to keep the same level of soundness even during the crisis.

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Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 22 (2013)
Issue (Month): 2 ()
Pages: 68-77

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Handle: RePEc:eee:revfin:v:22:y:2013:i:2:p:68-77
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  1. Martin Cihák & Heiko Hesse, 2008. "Islamic Banks and Financial Stability: An Empirical Analysis," IMF Working Papers 08/16, International Monetary Fund.
  2. Xavier Freixas & Bruno Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, pages 611-640.
  3. Hennie Van Greuning & Zamir Iqbal, 2008. "Risk Analysis for Islamic Banks," World Bank Publications, The World Bank, number 6923.
  4. Syed Ali, Salman, 2007. "Financial Distress And Bank Failure: Lessons From Closure Of Ihlas Finans In Turkey," Journal of Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 14, pages 2-52.
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  8. Chong, Beng Soon & Liu, Ming-Hua, 2009. "Islamic banking: Interest-free or interest-based?," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 125-144, January.
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  10. Joshua Charap & Serhan Cevik, 2011. "The Behavior of Conventional and Islamic Bank Deposit Returns in Malaysia and Turkey," IMF Working Papers 11/156, International Monetary Fund.
  11. Olson, Dennis & Zoubi, Taisier A., 2008. "Using accounting ratios to distinguish between Islamic and conventional banks in the GCC region," The International Journal of Accounting, Elsevier, vol. 43(1), pages 45-65, March.
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