Abstract
This paper investigates the cyclicality of Islamic banking relative to conventional banking. It examines whether loan growth and profitability have a different sensitivity to economic growth for Islamic banks and for conventional banks. We used panel data from 525 banks covering 16 countries with dual banking systems spanning the period from 2008 to 2018. We found no difference in lending cyclicality: Islamic banks and conventional banks both have procyclical lending behavior. Profitability, on the other hand, is procyclical for Islamic banks but not for conventional banks. Our findings support the view that Islamic banking presence does not contribute to strengthened economic stability.
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Notes
Muhammad Chapra, a leading scholar in Islamic economics, observes that the Islamic financial system may “not be able to be a genuine reflection of Islamic teachings if it fails to realize the vision of Islam by actualizing justice, which is one of the primary objectives of Islam” (2007, p. 325).
Iran and Sudan have full-fledged Islamic financial systems. As we wanted to compare Islamic banks to conventional banks in dual economies, we did not include these countries in our dataset.
Random effects are required because we have a dummy variable (Islamic bank) in our estimations.
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We acknowledge the comments from the two anonymous referees.
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Weill, L., Zins, A. Is Islamic Banking More Procyclical? Cross-Country Evidence. Comp Econ Stud 63, 318–335 (2021). https://doi.org/10.1057/s41294-020-00143-y
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DOI: https://doi.org/10.1057/s41294-020-00143-y