Stability in Islamic, conventional, and socially responsible banks: Evidence from MENA countries

Abstract

This study empirically estimates financial stability and its determinants in 40 Islamic banks, 168 conventional banks, and 8 socially responsible banks (SRBs) in MENA region during the period 2005-2012. The dependent variables in this study are capital ratio (equity to total assets) and z-score. The statistical approaches to find the relationship between financial stability indicators and their determinants are ordinary least square (OLS) and fixed effects model FEM). The results suggest that the SRBs are the most stable banks while, Islamic banks are highly risky. Moreover, conventional banks score the minimum capitalisation. The stability in Islamic banks is positively affected by ROA and age. Furthermore, the main determinants of capitalisation in Islamic banks are operating leverage, GDP, and market capitalisation. In conventional banking, size and profitability are important to stability. The capitals have effective associations with lending, ROA, and market development. In SRBs, banks achieve better stability in countries with higher inflation. This study could help bankers, policy makers and economists who focus on MENA region. The coverage of period 2005-2012 could be a limitation and the availability of data for the Islamic and socially responsible banks in MENA area could be another limitation as well.