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Time series analysis of financial stability of banks: Evidence from Saudi Arabia

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  • Ghassan, Hassan B.
  • Fachin, Stefano

Abstract

Islamic banks are characterized by their compliance to Islamic laws and practices, primarily the prohibition of interest and the trading of loans. During the 2008–2009 financial crisis, when a large number of conventional banks announced bankruptcy, no Islamic bank failures were reported. However, there is no clear consensus in the literature on the question of whether Islamic banks are more or less stable than conventional banks. To shed some light on this issue, we studied a sample of Saudi banks using quarterly data over a period centered on the 2008 financial crisis. Careful analysis of the data suggested first of all that many of the variables typically used in financial stability studies may be non-stationary, a methodological point largely ignored in the literature. Using time series methods suitable for this type of data, we concluded that individual heterogeneity may matter more than either the conventional or Islamic nature of the banks. Concentrating on the largest banks, we find the Islamic banks contribute positively to the stability of the system.

Suggested Citation

  • Ghassan, Hassan B. & Fachin, Stefano, 2016. "Time series analysis of financial stability of banks: Evidence from Saudi Arabia," Review of Financial Economics, Elsevier, vol. 31(C), pages 3-17.
  • Handle: RePEc:eee:revfin:v:31:y:2016:i:c:p:3-17
    DOI: 10.1016/j.rfe.2016.06.007
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    1. repec:eee:finsta:v:34:y:2018:i:c:p:12-43 is not listed on IDEAS
    2. Ghassan, Hassan B. & Krichene, Noureddine, 2017. "Financial Stability of Conventional and Islamic Banks: A Survey," MPRA Paper 82372, University Library of Munich, Germany.

    More about this item

    Keywords

    Financial crisis; Financial stability; z-score model; Islamic banks; Saudi Arabia;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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