Political systems and the financial soundness of Islamic banks

Bitar, Mohammad; Hassan, Mohammad Kabir; Walker, Thomas

Abstract

We investigate whether and how political systems affect the financial soundness of conventional and Islamic banks. Using factors extracted from principal component analysis, we find that Islamic banks underperform their conventional counterparts in more democratic political systems but outperform them in hybrid and Sharia'a-based legal systems. The findings reflect the challenges Islamic banks face in Western countries in terms of perception, financial infrastructure, and regulatory constraints while mirroring the recognition of their specificities and their cultural and religious compliance with Sharia'a law in Muslim countries. The findings are robust to a battery of alternative estimation techniques and methods of correcting standard errors.

Citation

Bitar, M., Hassan, M. K., & Walker, T. (2017). Political systems and the financial soundness of Islamic banks. Journal of Financial Stability, 31, 18-44. https://doi.org/10.1016/j.jfs.2017.06.002

• Journal Article Type: Article
• Acceptance Date: Jun 6, 2017
• Online Publication Date: Jun 10, 2017
• Publication Date: 2017-08
• Deposit Date: Oct 9, 2019
• Publicly Available Date: Oct 29, 2019
• Journal: Journal of Financial Stability
• Print ISSN: 1572-3089
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 31
• Pages: 18-44
• DOI: https://doi.org/10.1016/j.jfs.2017.06.002
• Keywords: Islamic banks; financial soundness; democracy; legal systems JEL classification: C38; G01; G21; P5; Z12 2
• Public URL: https://nottingham-repository.worktribe.com/output/2791449
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1572308917304126