Are Islamic Banks More Resilient during Financial Panics?
This study uses data from Pakistan
Abstract
Rapid growth of Islamic banking in developing countries is accompanied with claims about its relative resilience to financial crises as compared to conventional banking. However, little empirical evidence is available to support such claims. Using data from Pakistan, where Islamic and conventional banks co-exist, the authors compare these banks during a financial panic. Their results show that Islamic bank branches are less prone to deposit withdrawals during financial panics, both unconditionally and after controlling for bank characteristics. The Islamic branches of banks that have both Islamic and conventional operations tend to attract (rather than lose) deposits during panics, which suggests a role for religious branding. They also find that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. Their findings suggest that greater financial inclusion of faith-based groups may enhance the stability of the banking system.
This paper is part of a research project on macroeconomic policy in low‐income countries supported by the UK Department for International Development (DFID).
Citation
Moazzam Farooq, Sajjad Zaheer (2015) Are Islamic Banks More Resilient during Financial Panics? IMF Working Paper No. 15/41
Farooq, M. and Zaheer, S. (2015) Are Islamic Banks More Resilient during Financial Panics? Pacific Economic Review, 20: 101-124. doi:10.1111/1468-0106.12096