Arbeitspapier
Will Islamic Banking make the World less risky? An Empirical Analysis of Capital Structure, Risk Shifting and Financial Stability
We use a classic Merton credit risk framework to argue that Islamic Banking Institutions (IBIs) face less incentive to take on risks than Conventional Banking Institutions (CBI). IBIs have less incentive for risk shifting both in and outside of distress situations. We test and confirm this prediction in an empirical analysis based on a dataset covering all CBIs, IBIs, and Islamic and conventional subsidiaries of mixed banking institutions in Pakistan. We find that full-fledged Islamic banks (IBs) are indeed more stable than conventional banking institutions (CBIs), and are better capitalized than their conventional counterparts. IBIs also have less volatile asset returns, less non-performing loans (NPLs) and lower loan loss provisioning. Similar results obtain for Islamic windows of mixed banks compared with conventional windows. The analysis suggests that the loss absorption capacity of Islamic banks leads to less risk taking and a more stable banking system.
- Language
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Englisch
- Bibliographic citation
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Series: Tinbergen Institute Discussion Paper ; No. 15-051/VI/DSF92
- Classification
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Wirtschaft
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Cultural Economics: Religion
- Subject
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Islamic Banking
risk shifting
asset quality
financial stability
- Event
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Geistige Schöpfung
- (who)
-
Farooq, Moazzam
van Wijnbergen, Sweder
Zaheer, Sajjad
- Event
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Veröffentlichung
- (who)
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Tinbergen Institute
- (where)
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Amsterdam and Rotterdam
- (when)
-
2015
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Farooq, Moazzam
- van Wijnbergen, Sweder
- Zaheer, Sajjad
- Tinbergen Institute
Time of origin
- 2015
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