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Islamic Banks and Financial Stability; An Empirical Analysis

  • Martin Cihák
  • Heiko Hesse

The relative financial strength of Islamic banks is assessed empirically based on evidence covering individual Islamic and commercial banks in 18 banking systems with a substantial presence of Islamic banking. We find that (i) small Islamic banks tend to be financially stronger than small commercial banks; (ii) large commercial banks tend to be financially stronger than large Islamic banks; and (iii) small Islamic banks tend to be financially stronger than large Islamic banks, which may reflect challenges of credit risk management in large Islamic banks. We also find that the market share of Islamic banks does not have a significant impact on the financial strength of other banks.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/16.

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Length: 29
Date of creation: 01 Jan 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/16
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  1. 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.
  2. Choudhry, Nurun N. & Mirakhor, Abbas, 1997. "Indirect Instruments Of Monetary Control In An Islamic Financial System," Journal of Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 4, pages 28-65.
  3. S. Mishkin, Frederic, 1999. "Financial consolidation: Dangers and opportunities," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 675-691, February.
  4. International Monetary Fund, 2002. "Islamic Financial Institutions and Products in the Global Financial System; Key Issues in Risk Management and Challenges Ahead," IMF Working Papers 02/192, International Monetary Fund.
  5. Juan Sole, 2007. "Introducing Islamic Banks Into Coventional Banking Systems," IMF Working Papers 07/175, International Monetary Fund.
  6. Andreas Jobst, 2007. "The Economics of Islamic Finance and Securitization," IMF Working Papers 07/117, International Monetary Fund.
  7. Boyd, John H. & Runkle, David E., 1993. "Size and performance of banking firms : Testing the predictions of theory," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 47-67, February.
  8. Luca Errico & Mitra Farahbaksh, 1998. "Islamic Banking; Issues in Prudential Regulations and Supervision," IMF Working Papers 98/30, International Monetary Fund.
  9. Allen, Franklin & Gale, Douglas, 2004. "Competition and Financial Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 453-80, June.
  10. Laeven, Luc & Levine, Ross, 2005. "Is There a Diversification Discount in Financial Conglomerates?," CEPR Discussion Papers 5121, C.E.P.R. Discussion Papers.
  11. El-Hawary & Dahlia & Grais, Wafik & Iqbal, Zamir, 2004. "Regulating islamic financial institutions : The nature of the regulated," Policy Research Working Paper Series 3227, The World Bank.
  12. Yudistira, Donsyah, 2004. "Efficiency In Islamic Banking: An Empirical Analysis Of Eighteen Banks," Journal of Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 12, pages 2-19.
  13. Abbas Mirakhor & Mohsin S. Khan, 1991. "Islamic Banking," IMF Working Papers 91/88, International Monetary Fund.
  14. Martin Cihák & Simon Wolfe & Klaus Schaeck, 2006. "Are More Competitive Banking Systems More Stable?," IMF Working Papers 06/143, International Monetary Fund.
  15. Heiko Hesse & Andreas (Andy) Jobst & Juan Solé, 2008. "Trends and Challenges in Islamic Finance," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 9(2), pages 175-193, April.
  16. Martin Cihák & Heiko Hesse, 2007. "Cooperative Banks and Financial Stability," IMF Working Papers 07/2, International Monetary Fund.
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