Basel Compliance and Financial Stability: Evidence from Islamic Banks

41 Pages Posted: 9 Aug 2017

See all articles by Mohammad Bitar

Mohammad Bitar

Nottingham University Business School; University of Nottingham

Sami Ben Naceur

International Monetary Fund (IMF)

Rym Ayadi

HEC Montreal ; HEC Montreal

Thomas F. Walker

World Bank; Cornell University

Date Written: July 2017

Abstract

The paper provides robust evidence that compliance with Basel Core Principles (BCPs) has a strong positive effect on the Z-score of conventional banks, albeit less pronounced on the Zscoreof Islamic banks. Using a sample of banks operating in 19 developing countries, the results appear to be driven by capital ratios, a component of Z-score for the two types of banks. Even though smaller on Islamic banks, individual chapters of BCPs also suggest a positive effect on the stability of conventional banks. The findings support the effective role of BCP standards in improving bank stability, whose important implications led to the Islamic Financial Services Board (IFSB) publication of new recommendations in 2015 to bring BCP standards in line with the Core Principles for Islamic Finance Regulation (CPIFRs) standards. Our findings suggest that because Islamic banks are benchmarked closely to BCPs, the implementation of CPFIRs should also positively affect their stability.

Keywords: BCPs, CPIFRs, Stability, Islamic banks, Government Policy and Regulation, Comparative Analysis of Economic Systems

JEL Classification: G18, G21, P51

Suggested Citation

Bitar, Mohammad and Bitar, Mohammad and Ben Naceur, Sami and Ayadi, Rym and Ayadi, Rym and Walker, Thomas F. and Walker, Thomas F., Basel Compliance and Financial Stability: Evidence from Islamic Banks (July 2017). Available at SSRN: https://ssrn.com/abstract=3014090 or http://dx.doi.org/10.2139/ssrn.3014090

Mohammad Bitar (Contact Author)

University of Nottingham ( email )

Nottingham, Québec
Canada

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Sami Ben Naceur

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Rym Ayadi

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

Thomas F. Walker

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Cornell University ( email )

Department of Economics
414 Uris Hall
Ithaca, NY 14853-7601
United States

HOME PAGE: http://sites.google.com/a/cornell.edu/thomaswalker/

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