The asymmetrical linkage between oil price and banking stability in the MENA region

Abstract

Purpose This paper aims to empirically investigate the asymmetrical relationship between changes in oil price and the banking stability of the conventional and Islamic banks in the Middle East and North African (MENA) countries. Design/methodology/approach This paper measures banking stability with Z-score and probability of default using the Generalized Method of Moment. This paper selects a sample of conventional and Islamic banks operating within the MENA oil-producing states between 2008 and 2016. Findings The result of this paper reveals that the banking stability of the two types of banks responds to positive and negative shocks in oil prices. Thus, the stability of conventional banks is slightly better than that of Islamic banks in the region. Consequently, this paper also reveals that bank capitalization improves with the banking stability of the two banking systems in the region. Practical implications The findings of this paper will help the banks in the MENA oil-producing countries with strategies for improving banking stability during the oil price fluctuations and provide the policymakers with possible time for bank capital reform. Originality/value This paper explores the impact of the international oil price shocks on Islamic and conventional banks in one of the essential global oil-producing regions. As such, this paper extends the banking stability literature by accounting for the role of oil shock prices on banking distance and the probability of default. To the best of the authors’ knowledge, this is the first investigation of different transmission channels of oil price fluctuations in the region while considering the dual banking system in the hub of Islamic banks.