Stability of Conventional and Islamic banks, externalities and resilience to crises: evidences from comprehensive Saudi banks' time-series data

There is a number of theoretical reasons that suggest that Islamic banks (hereafter, IBs) are more stable and financially more resilient than Conventional banks (hereafter, CBs) during times of crises. Hence, their presence in a mixed banking system should improve the stability of the banking system as a whole. This paper aimed at testing this conjecture by focusing on the Saudi banking context. It employed a comprehensive sample covering all IBs and CBs belonging to the Saudi banking system, and a long quarterly time-series financial data covering the 2007-2018 period. By employing the z-score index as a measure of bank's stability, the statistic and econometric exercises showed that: i) IBs, whether Large or Small, are significantly more stable than CBs. ii) IBs exert positive externalities on CBs' stability. iii) Some banks specifics, sectorial and macroeconomic factors are found to be significantly related to banks' stability. iv) IBs are found to significantly better resist than CBs to the GFC of 2008/09. v) The 2014/16 crisis did not affect stability of both IBs and CBs, which suggests that soundness of the entire Saudi banking system improved after the GFC crisis. vi) Finally, the econometric exercise supports the distinction between Large and Small banks when analyzing their stability factors.