Empirical Evidence of Financial Soundness of Islamic Banking System
By Faiz.M.Shaikh, Nisar Ahmed Pahore & Saeed Ahmed Buriro
Abstract:
This research investigates the Islamic banking and financial soundness some empirical evidence. Data were collected from various secondary sources. It was revealed that as the presence of Islamic banks grows in a country’s financial system, there is no significant impact on the soundness of other banks. This suggests that Islamic and conventional banks can co-exist in the same system without substantial ‘crowding out’ effects through competition and deteriorating soundness. These findings are subject to several caveats relating to the cross-country data. Databases are often incomplete in coverage of Shariah-compliant and conventional banks. Moreover, we focused only on fully-fledged Islamic banks and did not cover Islamic branches operated by some conventional banks. Data limitations also prevented the study from fully taking into account all aspects of Islamic financial contracts, for example, by distinguishing between PLS and other investments. Nonetheless, the main results are encouragingly robust with respect to a range of sensitivity tests, such as using different measures of financial soundness and different estimation methods. Our findings provide some comfort regarding the financial soundness of small Islamic banks. At the same time, they underscore the importance for regulators of paying attention to the prudential risks of Islamic banks, in particular those that are large.
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