Financial Stability of Conventional and Islamic Banks: A Survey

This paper surveys the financial stability of conventional and Islamic banking. The stability of the financial system requires a greater role for equity and risk-sharing and tying the credits to the real economy. The rate of profit model (SR) proves the inferiority of the interest or fixed return (FR) contract model, and contributes significantly to the stability of a financial system; namely there is no debt expansion and contraction and the real investment might be higher in the SR model than in the FR model. Islamic Banks have shown relative stability to the first wave of the last international crisis of 2007-2008 and then contributed to reducing the volatility of global financial markets. The paper surveyed many empirical papers that use quantitative models to analyze the financial stability of the Islamic and conventional banks. The findings indicate that small Islamic banks are more stable than small conventional banks; large conventional banks are more stable than large Islamic banks; Islamic banks have been affected by the crisis; and traditional banks may be more competitive than the Islamic banks. In respect to business orientation, efficiency, risk-taking, and stability, some empirical papers find little significant differences between Islamic and conventional banks. The central bank policy to stabilize the price level or to smooth the interest rate changes seemed to enhance banking stability.