Main Article Content
Abstract
Purpose ― The study investigates the impact of the efficiency of Islamic banks on banking stability.
Method ― A panel data analysis using the Least Square Dummy Variable Corrected (LSDVC) method is employed to examine the impact of efficiency on banking stability in Islamic banks. The study has a sample of 54 Islamic banks across eight countries from 2013 to 2021.
Findings ― The findings reveal that the efficiency of Islamic banks has a positive and significant effect on banking stability. In addition, financial turmoil negatively and significantly affects the stability of Islamic banks but does not significantly affect institutional development. Additionally, financial turmoil can influence how effectively Islamic banks manage their businesses in response to banking stability. The outcomes are robust across various robustness methods.
Implications ― The results imply that the efficiency of Islamic banks has a pivotal role in banking stability, considering the efficiency level. To ensure the stability of Islamic banks, practitioners and regulators of Islamic banks have to achieve and maintain the efficiency of Islamic banks by implementing the required policies and guidelines.
Originality/Value ― Previous studies examining the impact of Islamic banks' efficiency on banking stability remain limited. The paper fills the research gap by examining how Islamic bank efficiency affects banking stability, considering the effects of financial turmoil and institutional development.
Keywords
Article Details
Copyright (c) 2024 Faaza Fakhrunnas, Younes Boubechtoula, Katiya Nahda, Mohammad Rezoanul Hoque
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References
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- Ahmad, W., & Luo, R. H. (2010). Comparison of banking efficiency in Europe: Islamic versus conventional banks. International Finance Review, 11(2010), 361–389. https://doi.org/10.1108/S1569-3767(2010)0000011016
- Albaity, M., Mallek, R. S., Abu, A. H., & Al-Tamimi, H. A. H. (2022). Bank credit growth and trust: Does institutional quality matter? Evidence from the association of Southeast Asian Nations. Asian Development Review, 39(2), 223–259. https://doi.org/10.1142/S0116110522500172
- Ali, S. S. (2007). Financial distress and bank failure: Lessons from closure of Ihlas Finans in Turkey. Islamic Economic Studies, 14(1), 1–52.
- Al-Khasawneh, J. A., Bassedat, K., Aktan, B., & Darshini Pun Thapa, P. (2012). Efficiency of Islamic banks: case of North African Arab countries. Qualitative Research in Financial Markets, 4(2–3), 228–239. https://doi.org/10.1108/17554171211252547
- Alqahtani, F., Mayes, D. G., & Brown, K. (2017). Islamic bank efficiency compared to conventional banks during the global crisis in the GCC region. Journal of International Financial Markets, Institutions and Money, 51, 58–74. https://doi.org/10.1016/j.intfin.2017.08.010
- Alsharif, M. (2021). Risk, efficiency and capital in a dual banking industry: Evidence from GCC banks. Managerial Finance, 47(8), 1213–1232. https://doi.org/10.1108/MF-10-2020-0529
- Anto, M. H., Fakhrunnas, F., & Tumewang, Y. K. (2022). Islamic banks credit risk performance for home financing: Before and during Covid-19 pandemic. Economic Journal of Emerging Markets, 14(1), 113–125. https://doi.org/10.20885/ejem.vol14.iss1.art9
- Asmild, M., Kronborg, D., Mahbub, T., & Matthews, K. (2019). The efficiency patterns of Islamic banks during the global financial crisis: The case of Bangladesh. Quarterly Review of Economics and Finance, 74, 67–74. https://doi.org/10.1016/j.qref.2018.04.004
- Aysun, U. (2016). Bank size and macroeconomic shock transmission: Does the credit channel operate through large or small banks? Journal of International Money and Finance, 65, 117–139. https://doi.org/10.1016/j.jimonfin.2016.04.001
- Azmi, W., Hassan, M. K., Houston, R., & Karim, M. S. (2021). ESG activities and banking performance: International evidence from emerging economies. Journal of International Financial Markets, Institutions and Money, 70, 101277. https://doi.org/10.1016/j.intfin.2020.101277
- Bruno, G. S. F. (2005). Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models. Economics Letters, 87(3), 361–366. https://doi.org/10.1016/j.econlet.2005.01.005
- Castro, V. (2013). Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI. Economic Modelling, 31(1), 672–683. https://doi.org/10.1016/j.econmod.2013.01.027
- Chiaramonte, L., Liu, F. H., Poli, F., & Zhou, M. (2016). How accurately can Z-score predict bank failure? Financial Markets, Institutions and Instruments, 25(5), 333–360. https://doi.org/10.1111/fmii.12077
- Chong, B. S., & Liu, M.-H. (2009). Islamic banking: Interest-free or interest-based? Pacific-Basin Finance Journal, 17(1), 125–144. https://doi.org/10.1016/j.pacfin.2007.12.003
- Dang, V. A., Kim, M., & Shin, Y. (2015). In search of robust methods for dynamic panel data models in empirical corporate finance. Journal of Banking and Finance, 53, 84–98. https://doi.org/10.1016/j.jbankfin.2014.12.009
- Danlami, M. R., Abduh, M., & Abdul Razak, L. (2022). CAMELS, risk-sharing financing, institutional quality and stability of Islamic banks: Evidence from 6 OIC countries. Journal of Islamic Accounting and Business Research, 13(8), 1155–1175. https://doi.org/10.1108/JIABR-08-2021-0227
- Demir, E., & Danisman, G. O. (2021). Banking sector reactions to COVID-19: The role of bank-specific factors and government policy responses. Research in International Business and Finance, 58(June 2020), 1–12. https://doi.org/10.1016/j.ribaf.2021.101508
- Elnahass, M., Trinh, V. Q., & Li, T. (2021). Global banking stability in the shadow of Covid-19 outbreak. Journal of International Financial Markets, Institutions and Money, 72, 101322. https://doi.org/10.1016/j.intfin.2021.101322
- Fakhrunnas, F., Nugrohowati, R. N. I., Haron, R., & Anto, M. B. H. (2022). The determinants of non-performing loans in the Indonesian banking industry: An asymmetric approach before and during the pandemic crisis. SAGE Open, 12(2), 1–13. https://doi.org/10.1177/21582440221102421
- Fakhrunnas, F., Tumewang, Y. K., & Anto, M. B. H. (2021). The impact of inflation on Islamic banks’ home financing risk: Before and during the COVID-19 outbreak. Banks and Bank Systems, 16(2), 78–90. https://doi.org/10.21511/bbs.16(2).2021.08
- Hidayat, S. E., Sakti, M. R. P., & Al-Balushi, R. A. A. (2021). Risk, efficiency and financial performance in the GCC banking industry: Islamic versus conventional banks. Journal of Islamic Accounting and Business Research, 12(4), 564–592. https://doi.org/10.1108/JIABR-05-2020-0138
- Ibrahim, M. H., & Rizvi, S. A. R. (2017). Do we need bigger Islamic banks? An assessment of bank stability. Journal of Multinational Financial Management, 40, 77–91. https://doi.org/10.1016/j.mulfin.2017.05.002
- ICD-Refinitiv. (2022). ICD-refinitiv Islamic finance development report 2022; Embracing Change.
- Law, S. H., Naseem, N. A. M., Lau, W. T., & Trinugroho, I. (2020). Can innovation improve income inequality? Evidence from panel data. Economic Systems, 44(4), 100815. https://doi.org/10.1016/j.ecosys.2020.100815
- Meisamy, H., & Gholipour, H. F. (2020). Challenges facing Islamic banking in Iran: Evaluation and policy implications. Journal of Islamic Monetary Economics and Finance, 6(3), 621–640.
- Miah, M. D., & Sharmeen, K. (2015). Relationship between capital, risk and efficiency: A comparative study between Islamic and conventional banks of Bangladesh. International Journal of Islamic and Middle Eastern Finance and Management, 8(2), 203–221. https://doi.org/10.1108/IMEFM-03-2014-0027
- Miah, M. D., & Uddin, H. (2017). Efficiency and stability: A comparative study between Islamic and conventional banks in GCC countries. Future Business Journal, 3(2), 172–185. https://doi.org/10.1016/j.fbj.2017.11.001
- Nabi, M. S., & Suliman, M. O. (2009). Institutions, banking development, and economic growth. Developing Economies, 47(4), 436–457. https://doi.org/10.1111/j.1746-1049.2009.00093.x
- Nickell, S. (1981). Biases in dynamic models with fixed effect. In Econometrica (Vol. 49, Issue 6, pp. 1417–1426).
- Rashid, A., & Jabeen, S. (2016). Analyzing performance determinants: Conventional versus Islamic Banks in Pakistan. Borsa Istanbul Review, 16(2), 92–107. https://doi.org/10.1016/j.bir.2016.03.002
- Rosman, R., Wahab, N. A., & Zainol, Z. (2014). Efficiency of Islamic banks during the financial crisis: An analysis of Middle Eastern and Asian countries. Pacific Basin Finance Journal, 28, 76–90. https://doi.org/10.1016/j.pacfin.2013.11.001
- Saeed, M., & Izzeldin, M. (2016). Examining the relationship between default risk and efficiency in Islamic and conventional banks. Journal of Economic Behavior and Organization, 132, 127–154. https://doi.org/10.1016/j.jebo.2014.02.014
- Safiullah, M., & Shamsuddin, A. (2022). Technical efficiency of Islamic and conventional banks with undesirable output: Evidence from a stochastic meta-frontier directional distance function. Global Finance Journal, 51, 100547. https://doi.org/10.1016/j.gfj.2020.100547
- Sakti, M. R. P., & Mohamad, A. (2018). Efficiency, stability and asset quality of Islamic vis-à-vis conventional banks: Evidence from Indonesia. Journal of Islamic Accounting and Business Research, 9(3), 378–400. https://doi.org/10.1108/JIABR-07-2015-0031
- Shakil, M. H., Mahmood, N., Tasnia, M., & Munim, Z. H. (2019). Do environmental, social and governance performance affect the financial performance of banks? A cross-country study of emerging market banks. Management of Environmental Quality: An International Journal, 30(6), 1331–1344. https://doi.org/10.1108/MEQ-08-2018-0155
- Terraza, V. (2015). The effect of bank size on risk ratios: Implications of banks’ performance. Procedia Economics and Finance, 30(15), 903–909. https://doi.org/10.1016/S2212-5671(15)01340-4
References
Abedifar, P., Molyneux, P., & Tarazi, A. (2013). Risk in Islamic banking. Review of Finance, 17(6), 2035–2096. https://doi.org/10.1093/rof/rfs041
Ahmad, W., & Luo, R. H. (2010). Comparison of banking efficiency in Europe: Islamic versus conventional banks. International Finance Review, 11(2010), 361–389. https://doi.org/10.1108/S1569-3767(2010)0000011016
Albaity, M., Mallek, R. S., Abu, A. H., & Al-Tamimi, H. A. H. (2022). Bank credit growth and trust: Does institutional quality matter? Evidence from the association of Southeast Asian Nations. Asian Development Review, 39(2), 223–259. https://doi.org/10.1142/S0116110522500172
Ali, S. S. (2007). Financial distress and bank failure: Lessons from closure of Ihlas Finans in Turkey. Islamic Economic Studies, 14(1), 1–52.
Al-Khasawneh, J. A., Bassedat, K., Aktan, B., & Darshini Pun Thapa, P. (2012). Efficiency of Islamic banks: case of North African Arab countries. Qualitative Research in Financial Markets, 4(2–3), 228–239. https://doi.org/10.1108/17554171211252547
Alqahtani, F., Mayes, D. G., & Brown, K. (2017). Islamic bank efficiency compared to conventional banks during the global crisis in the GCC region. Journal of International Financial Markets, Institutions and Money, 51, 58–74. https://doi.org/10.1016/j.intfin.2017.08.010
Alsharif, M. (2021). Risk, efficiency and capital in a dual banking industry: Evidence from GCC banks. Managerial Finance, 47(8), 1213–1232. https://doi.org/10.1108/MF-10-2020-0529
Anto, M. H., Fakhrunnas, F., & Tumewang, Y. K. (2022). Islamic banks credit risk performance for home financing: Before and during Covid-19 pandemic. Economic Journal of Emerging Markets, 14(1), 113–125. https://doi.org/10.20885/ejem.vol14.iss1.art9
Asmild, M., Kronborg, D., Mahbub, T., & Matthews, K. (2019). The efficiency patterns of Islamic banks during the global financial crisis: The case of Bangladesh. Quarterly Review of Economics and Finance, 74, 67–74. https://doi.org/10.1016/j.qref.2018.04.004
Aysun, U. (2016). Bank size and macroeconomic shock transmission: Does the credit channel operate through large or small banks? Journal of International Money and Finance, 65, 117–139. https://doi.org/10.1016/j.jimonfin.2016.04.001
Azmi, W., Hassan, M. K., Houston, R., & Karim, M. S. (2021). ESG activities and banking performance: International evidence from emerging economies. Journal of International Financial Markets, Institutions and Money, 70, 101277. https://doi.org/10.1016/j.intfin.2020.101277
Bruno, G. S. F. (2005). Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models. Economics Letters, 87(3), 361–366. https://doi.org/10.1016/j.econlet.2005.01.005
Castro, V. (2013). Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI. Economic Modelling, 31(1), 672–683. https://doi.org/10.1016/j.econmod.2013.01.027
Chiaramonte, L., Liu, F. H., Poli, F., & Zhou, M. (2016). How accurately can Z-score predict bank failure? Financial Markets, Institutions and Instruments, 25(5), 333–360. https://doi.org/10.1111/fmii.12077
Chong, B. S., & Liu, M.-H. (2009). Islamic banking: Interest-free or interest-based? Pacific-Basin Finance Journal, 17(1), 125–144. https://doi.org/10.1016/j.pacfin.2007.12.003
Dang, V. A., Kim, M., & Shin, Y. (2015). In search of robust methods for dynamic panel data models in empirical corporate finance. Journal of Banking and Finance, 53, 84–98. https://doi.org/10.1016/j.jbankfin.2014.12.009
Danlami, M. R., Abduh, M., & Abdul Razak, L. (2022). CAMELS, risk-sharing financing, institutional quality and stability of Islamic banks: Evidence from 6 OIC countries. Journal of Islamic Accounting and Business Research, 13(8), 1155–1175. https://doi.org/10.1108/JIABR-08-2021-0227
Demir, E., & Danisman, G. O. (2021). Banking sector reactions to COVID-19: The role of bank-specific factors and government policy responses. Research in International Business and Finance, 58(June 2020), 1–12. https://doi.org/10.1016/j.ribaf.2021.101508
Elnahass, M., Trinh, V. Q., & Li, T. (2021). Global banking stability in the shadow of Covid-19 outbreak. Journal of International Financial Markets, Institutions and Money, 72, 101322. https://doi.org/10.1016/j.intfin.2021.101322
Fakhrunnas, F., Nugrohowati, R. N. I., Haron, R., & Anto, M. B. H. (2022). The determinants of non-performing loans in the Indonesian banking industry: An asymmetric approach before and during the pandemic crisis. SAGE Open, 12(2), 1–13. https://doi.org/10.1177/21582440221102421
Fakhrunnas, F., Tumewang, Y. K., & Anto, M. B. H. (2021). The impact of inflation on Islamic banks’ home financing risk: Before and during the COVID-19 outbreak. Banks and Bank Systems, 16(2), 78–90. https://doi.org/10.21511/bbs.16(2).2021.08
Hidayat, S. E., Sakti, M. R. P., & Al-Balushi, R. A. A. (2021). Risk, efficiency and financial performance in the GCC banking industry: Islamic versus conventional banks. Journal of Islamic Accounting and Business Research, 12(4), 564–592. https://doi.org/10.1108/JIABR-05-2020-0138
Ibrahim, M. H., & Rizvi, S. A. R. (2017). Do we need bigger Islamic banks? An assessment of bank stability. Journal of Multinational Financial Management, 40, 77–91. https://doi.org/10.1016/j.mulfin.2017.05.002
ICD-Refinitiv. (2022). ICD-refinitiv Islamic finance development report 2022; Embracing Change.
Law, S. H., Naseem, N. A. M., Lau, W. T., & Trinugroho, I. (2020). Can innovation improve income inequality? Evidence from panel data. Economic Systems, 44(4), 100815. https://doi.org/10.1016/j.ecosys.2020.100815
Meisamy, H., & Gholipour, H. F. (2020). Challenges facing Islamic banking in Iran: Evaluation and policy implications. Journal of Islamic Monetary Economics and Finance, 6(3), 621–640.
Miah, M. D., & Sharmeen, K. (2015). Relationship between capital, risk and efficiency: A comparative study between Islamic and conventional banks of Bangladesh. International Journal of Islamic and Middle Eastern Finance and Management, 8(2), 203–221. https://doi.org/10.1108/IMEFM-03-2014-0027
Miah, M. D., & Uddin, H. (2017). Efficiency and stability: A comparative study between Islamic and conventional banks in GCC countries. Future Business Journal, 3(2), 172–185. https://doi.org/10.1016/j.fbj.2017.11.001
Nabi, M. S., & Suliman, M. O. (2009). Institutions, banking development, and economic growth. Developing Economies, 47(4), 436–457. https://doi.org/10.1111/j.1746-1049.2009.00093.x
Nickell, S. (1981). Biases in dynamic models with fixed effect. In Econometrica (Vol. 49, Issue 6, pp. 1417–1426).
Rashid, A., & Jabeen, S. (2016). Analyzing performance determinants: Conventional versus Islamic Banks in Pakistan. Borsa Istanbul Review, 16(2), 92–107. https://doi.org/10.1016/j.bir.2016.03.002
Rosman, R., Wahab, N. A., & Zainol, Z. (2014). Efficiency of Islamic banks during the financial crisis: An analysis of Middle Eastern and Asian countries. Pacific Basin Finance Journal, 28, 76–90. https://doi.org/10.1016/j.pacfin.2013.11.001
Saeed, M., & Izzeldin, M. (2016). Examining the relationship between default risk and efficiency in Islamic and conventional banks. Journal of Economic Behavior and Organization, 132, 127–154. https://doi.org/10.1016/j.jebo.2014.02.014
Safiullah, M., & Shamsuddin, A. (2022). Technical efficiency of Islamic and conventional banks with undesirable output: Evidence from a stochastic meta-frontier directional distance function. Global Finance Journal, 51, 100547. https://doi.org/10.1016/j.gfj.2020.100547
Sakti, M. R. P., & Mohamad, A. (2018). Efficiency, stability and asset quality of Islamic vis-à-vis conventional banks: Evidence from Indonesia. Journal of Islamic Accounting and Business Research, 9(3), 378–400. https://doi.org/10.1108/JIABR-07-2015-0031
Shakil, M. H., Mahmood, N., Tasnia, M., & Munim, Z. H. (2019). Do environmental, social and governance performance affect the financial performance of banks? A cross-country study of emerging market banks. Management of Environmental Quality: An International Journal, 30(6), 1331–1344. https://doi.org/10.1108/MEQ-08-2018-0155
Terraza, V. (2015). The effect of bank size on risk ratios: Implications of banks’ performance. Procedia Economics and Finance, 30(15), 903–909. https://doi.org/10.1016/S2212-5671(15)01340-4