Abstract
An emerging literature in the aftermath of the recent GFC has attempted to investigate whether growing Islamic banking and finance practices add any systemic benefit to the global economic system. This paper explores the issue by examining the determinants of systemic risk for a sample of Islamic banks and financial institutions compared with conventional counterparts. Systemic risk is defined as a function of the stock market capitalization, marginal expected shortfall, leverage ratio, correlation of return, and volatility of return. Our finding shows the impact of market capitalization on reducing the systemic risk of Islamic banks and financial institutions is relatively higher than conventional counterparts. This is consistent with the results of some previous studies on the perceived benefits of Islamic finance practices. However, the influence of leverage ratio and marginal expected shortfall on systemic risk of Islamic banks and financial institutions is not significantly different from the results for banks and financial institutions in the control samples. Overall, our result provides some support for the notion that Islamic banking and finance practices can provide more systemic benefit to the financial system than conventional counterparts.
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Notes
- 1.
- 2.
For more information on interconnection between Islamic finance and sustainable finance, the interested readers may refer to Myers and Hassanzadeh (2013).
- 3.
Time magazine initiated a pole, by asking the public to nominate 25 top people who should be blamed for causing the GFC.
- 4.
- 5.
- 6.
Refer to Blundell-Wignall and Atkinson (2010a, b), and Revisions to the Basel II Market Risk Framework, BIS (2009). Retrieved from: www.bis.org/publ/bcbs158.pdf.
- 7.
Islamic Banking, OECD Observer. Retrieved from: http://www.oecdobserver.org/news/archivestory.php/aid/2865/_Islamic_banking_.html.
- 8.
M. Parker, Arab News, September 2010. Retrieved from: http://www.arabnews.com/node/355547.
- 9.
Ernst & Young, World Islamic Banking Competitiveness Report, 2013–2014.
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For instance, Shariah Advisory Board may allow banks to offer limited interest bearing deposit accounts.
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Billio et al. (2012) study is an example.
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This theoretical argument is largely based on Benoit et al. (2013).
- 17.
For a theoretical discussion on the relationship between volatility and leverage, interested readers refer to Engle and Siriwardane (2014).
- 18.
This problem also extends to CoVaR, another popular systemic risk estimate attributed to Adrian and Brunnermeier (2011).
- 19.
Drawing on the paper by Clogg et al. (1995), the formula used for this statistical test is: \( Z = \frac{\beta_1-{\beta}_2}{\sqrt{S{E}_{{}_1}^2+ S{E}_2^2}} \)
where, \( \beta 1 \) and \( \beta 2 \)are estimated coefficients and SE1 and SE2 are their corresponding standard deviations.
- 20.
Refer to Khan and Ahmad (2001).
- 21.
For reasons behind banks hesitation to use profit and loss sharing contracts, interested readers may refer to Komling (2014).
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Sadeghi, M. (2017). The Systemic Benefits of Islamic Banking and Finance Practices: A Comparative Study. In: Hacioğlu, Ü., Dinçer, H. (eds) Global Financial Crisis and Its Ramifications on Capital Markets. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-47021-4_27
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DOI: https://doi.org/10.1007/978-3-319-47021-4_27
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