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The impact of a dual banking system on macroeconomic efficiency

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  • Hunjra, Ahmed Imran
  • Islam, Faridul
  • Verhoeven, Peter
  • Hassan, M. Kabir

Abstract

The rapid growth of Islamic banking around the globe has led to questions about its role in the economy. In this paper, we examine whether Islamic banking acts as a substitute or complement to conventional banking in promoting macroeconomic efficiency in countries with a dual-banking system. Using a one-stage Stochastic Frontier (SF) approach, we find evidence that similar to conventional banking, Islamic banking positively contributes to a country's macroeconomic efficiency. However, Islamic banking acts as a substitute not as a complement to conventional banking in contributing to macroeconomic efficiency. The results are robust to using both credit and deposit ratios as proxies of financial development. The findings are consistent with growing evidence that despite the apparent philosophical differences between the two banking systems, Islamic banking is increasingly converging in its operations to conventional banking.

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  • Hunjra, Ahmed Imran & Islam, Faridul & Verhoeven, Peter & Hassan, M. Kabir, 2022. "The impact of a dual banking system on macroeconomic efficiency," Research in International Business and Finance, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:riibaf:v:61:y:2022:i:c:s0275531922000356
    DOI: 10.1016/j.ribaf.2022.101647
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    More about this item

    Keywords

    Macroeconomic efficiency; Stochastic frontier analysis; Islamic banking; Conventional banking; Dual banking;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E29 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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