IDEAS home Printed from https://ideas.repec.org/a/eee/mulfin/v62y2021ics1042444x21000177.html
   My bibliography  Save this article

Trade, financial openness and dual banking economies: Evidence from GCC Region

Author

Listed:
  • Khan, Ashraf
  • Hassan, M. Kabir
  • Paltrinieri, Andrea
  • Bahoo, Salman

Abstract

The recent wave of liberalization in Gulf Cooperation Council (GCC) countries has opened up a debate on the role of Islamic finance in the financial development of an economy. Using a comprehensive dataset of 43 Islamic and 49 conventional banks for the period 2007–2015, in this paper, we investigate the impact of trade and financial openness on financial development in the GCC region. We find that trade and financial openness have a positive effect on the profitability of both banking systems, while the interaction term of openness is negative for the profitability of Islamic banks. Moreover, trade and financial openness affect Islamic banks differently than conventional banks. Notably, we unveil that trade and financial openness decrease the loan volume of Islamic banks but increase their stability.

Suggested Citation

  • Khan, Ashraf & Hassan, M. Kabir & Paltrinieri, Andrea & Bahoo, Salman, 2021. "Trade, financial openness and dual banking economies: Evidence from GCC Region," Journal of Multinational Financial Management, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:mulfin:v:62:y:2021:i:c:s1042444x21000177
    DOI: 10.1016/j.mulfin.2021.100693
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042444X21000177
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.mulfin.2021.100693?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Claessens, Stijn & Coleman, Nicholas & Donnelly, Michael, 2018. "“Low-For-Long” interest rates and banks’ interest margins and profitability: Cross-country evidence," Journal of Financial Intermediation, Elsevier, vol. 35(PA), pages 1-16.
    2. Dong-Hyeon Kim & Shu-Chin Lin & Yu-Bo Suen, 2010. "Are Financial Development and Trade Openness Complements or Substitutes?," Southern Economic Journal, John Wiley & Sons, vol. 76(3), pages 827-845, January.
    3. Olufemi A. Aluko & Michael Adebayo Ajayi, 2018. "Determinants of banking sector development: Evidence from Sub-Saharan African countries," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 18(2), pages 122-129, June.
    4. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
    5. Imam, Patrick & Kpodar, Kangni, 2016. "Islamic banking: Good for growth?," Economic Modelling, Elsevier, vol. 59(C), pages 387-401.
    6. Luo, Yun & Tanna, Sailesh & De Vita, Glauco, 2016. "Financial openness, risk and bank efficiency: Cross-country evidence," Journal of Financial Stability, Elsevier, vol. 24(C), pages 132-148.
    7. Zhang, Chengsi & Zhu, Yueteng & Lu, Zhe, 2015. "Trade openness, financial openness, and financial development in China," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 287-309.
    8. Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-882, October.
    9. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    10. Asli Demirgüč-Kunt & Luc Laeven & Ross Levine, 2004. "Regulations, market structure, institutions, and the cost of financial intermediation," Proceedings, Federal Reserve Bank of Cleveland, pages 593-626.
    11. Sk Alamgir Hossain & Syed Moudud-Ul-Huq & Marufa Binta Kader & David McMillan, 2020. "Impact of trade openness on bank risk-taking behavior: Evidence from a developing country," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1765468-176, January.
    12. Abuzayed, Bana & Al-Fayoumi, Nedal & Molyneux, Phil, 2018. "Diversification and bank stability in the GCC," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 17-43.
    13. DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January.
    14. Asli Demirguk-Kunt & Thorsten Beck & Ouarda Merrouche, 2013. "Islamic Banking versus Conventional Banking: Business model, Efficiency, and Stability," Post-Print hal-01638080, HAL.
    15. Bremus, Franziska & Buch, Claudia M., 2017. "Granularity in banking and growth: Does financial openness matter?," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 300-316.
    16. Kabir, Md. Nurul & Worthington, Andrew & Gupta, Rakesh, 2015. "Comparative credit risk in Islamic and conventional bank," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 327-353.
    17. Baltagi, Badi H. & Demetriades, Panicos O. & Law, Siong Hook, 2009. "Financial development and openness: Evidence from panel data," Journal of Development Economics, Elsevier, vol. 89(2), pages 285-296, July.
    18. Hassan, M. Kabir & Aliyu, Sirajo, 2018. "A contemporary survey of islamic banking literature," Journal of Financial Stability, Elsevier, vol. 34(C), pages 12-43.
    19. Ashraf, Badar Nadeem, 2018. "Do trade and financial openness matter for financial development? Bank-level evidence from emerging market economies," Research in International Business and Finance, Elsevier, vol. 44(C), pages 434-458.
    20. Herwartz, Helmut & Walle, Yabibal M., 2014. "Openness and the finance-growth nexus," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 235-247.
    21. Hauner, David & Prati, Alessandro & Bircan, Cagatay, 2013. "The interest group theory of financial development: Evidence from regulation," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 895-906.
    22. Bourgain, Arnaud & Pieretti, Patrice & Zanaj, Skerdilajda, 2012. "Financial openness, disclosure and bank risk-taking in MENA countries," Emerging Markets Review, Elsevier, vol. 13(3), pages 283-300.
    23. Rihab Grassa & Kaouthar Gazdar, 2014. "Financial development and economic growth in GCC countries," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 41(6), pages 493-514, June.
    24. Safiullah, Md & Shamsuddin, Abul, 2019. "Risk-adjusted efficiency and corporate governance: Evidence from Islamic and conventional banks," Journal of Corporate Finance, Elsevier, vol. 55(C), pages 105-140.
    25. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    26. Pejman Abedifar & Philip Molyneux & Amine Tarazi, 2013. "Risk in Islamic Banking," Review of Finance, European Finance Association, vol. 17(6), pages 2035-2096.
    27. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    28. Cevdet Denizer & Mustafa Dinc & Murat Tarimcilar, 2007. "Financial liberalization and banking efficiency: evidence from Turkey," Journal of Productivity Analysis, Springer, vol. 27(3), pages 177-195, June.
    29. Beck, Thorsten & Demirgüç-Kunt, Asli & Merrouche, Ouarda, 2013. "Islamic vs. conventional banking: Business model, efficiency and stability," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 433-447.
    30. Hassan, M. Kabir & Khan, Ashraf & Paltrinieri, Andrea, 2019. "Liquidity risk, credit risk and stability in Islamic and conventional banks," Research in International Business and Finance, Elsevier, vol. 48(C), pages 17-31.
    31. Martin Čihák & Heiko Hesse, 2010. "Islamic Banks and Financial Stability: An Empirical Analysis," Journal of Financial Services Research, Springer;Western Finance Association, vol. 38(2), pages 95-113, December.
    32. Kassim, Salina, 2016. "Islamic finance and economic growth: The Malaysian experience," Global Finance Journal, Elsevier, vol. 30(C), pages 66-76.
    33. Ashraf, Badar Nadeem & Qian, Ningyu & Shen, Yinjie (Victor), 2021. "The impact of trade and financial openness on bank loan pricing: Evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 47(C).
    34. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    35. Panicos Demetriades & Svetlana Andrianova, "undated". "Finance and Growth: What We Know and What We Need To Know," Discussion Papers in Economics 03/15, Division of Economics, School of Business, University of Leicester.
    36. Mohammed Mizanur Rahman & Munni Begum & Badar Nadeem Ashraf & Md. Abdul Kaium Masud, 2020. "Does Trade Openness Affect Bank Risk-Taking Behavior? Evidence from BRICS Countries," Economies, MDPI, vol. 8(3), pages 1-30, September.
    37. Ibrahim, Mansor H. & Rizvi, Syed Aun R., 2018. "Bank lending, deposits and risk-taking in times of crisis: A panel analysis of Islamic and conventional banks," Emerging Markets Review, Elsevier, vol. 35(C), pages 31-47.
    38. Niels Hermes & Vu Thi Hong Nhung, 2010. "The impact of financial liberalization on bank efficiency: evidence from Latin America and Asia," Applied Economics, Taylor & Francis Journals, vol. 42(26), pages 3351-3365.
    39. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
    40. Menyah, Kojo & Nazlioglu, Saban & Wolde-Rufael, Yemane, 2014. "Financial development, trade openness and economic growth in African countries: New insights from a panel causality approach," Economic Modelling, Elsevier, vol. 37(C), pages 386-394.
    41. Siong Hook Law, 2009. "Trade Openness, Capital Flows and Financial Development in Developing Economies," International Economic Journal, Taylor & Francis Journals, vol. 23(3), pages 409-426.
    42. Yanikkaya, Halit & Gumus, Nihat & Pabuccu, Yasar Ugur, 2018. "How profitability differs between conventional and Islamic banks: A dynamic panel data approach," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 99-111.
    43. Albaity, Mohamed & Mallek, Ray Saadaoui & Noman, Abu Hanifa Md., 2019. "Competition and bank stability in the MENA region: The moderating effect of Islamic versus conventional banks," Emerging Markets Review, Elsevier, vol. 38(C), pages 310-325.
    44. Bonaccorsi di Patti, Emilia & Hardy, Daniel C., 2005. "Financial sector liberalization, bank privatization, and efficiency: Evidence from Pakistan," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2381-2406, August.
    45. Siong Hook Law, 2008. "Does a Country's Openness to Trade and Capital Accounts Lead to Financial Development? Evidence from Malaysia," Asian Economic Journal, East Asian Economic Association, vol. 22(2), pages 161-177, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Várkonyi, Patrik & Szücs, Tamás & Cziglerné, Erb Edina & Pasitka, Ármin, 2024. "A pénzügyi instrumentumok új számviteli standardja a Covid árnyékában [European banks implementation of IFRS 9 in the shadow of the pandemic]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 201-222.
    2. Hashed Mabkhot & Hamid Abdulkhaleq Hasan Al-Wesabi, 2022. "Banks’ Financial Stability and Macroeconomic Key Factors in GCC Countries," Sustainability, MDPI, vol. 14(23), pages 1-21, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Paltrinieri, Andrea & Dreassi, Alberto & Rossi, Simone & Khan, Ashraf, 2021. "Risk-adjusted profitability and stability of Islamic and conventional banks: Does revenue diversification matter?," Global Finance Journal, Elsevier, vol. 50(C).
    2. Ashraf, Badar Nadeem & Qian, Ningyu & Shen, Yinjie (Victor), 2021. "The impact of trade and financial openness on bank loan pricing: Evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 47(C).
    3. Mohammed Mizanur Rahman & Munni Begum & Badar Nadeem Ashraf & Md. Abdul Kaium Masud, 2020. "Does Trade Openness Affect Bank Risk-Taking Behavior? Evidence from BRICS Countries," Economies, MDPI, vol. 8(3), pages 1-30, September.
    4. Gnangnon, Sèna Kimm, 2021. "Effect of poverty on financial development: Does trade openness matter?," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 97-112.
    5. Tongurai, Jittima & Vithessonthi, Chaiporn, 2023. "Financial openness and financial market development," Journal of Multinational Financial Management, Elsevier, vol. 67(C).
    6. Abuzayed, Bana & Al-Fayoumi, Nedal & Molyneux, Phil, 2018. "Diversification and bank stability in the GCC," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 17-43.
    7. Fu, Junhui & Liu, Yufang & Chen, Rongda & Yu, Xiaojian & Tang, Wen, 2020. "Trade openness, internet finance development and banking sector development in China," Economic Modelling, Elsevier, vol. 91(C), pages 670-678.
    8. Ashraf, Badar Nadeem, 2018. "Do trade and financial openness matter for financial development? Bank-level evidence from emerging market economies," Research in International Business and Finance, Elsevier, vol. 44(C), pages 434-458.
    9. Nosheen & Abdul Rashid, 2021. "Financial soundness of single versus dual banking system: explaining the role of Islamic banks," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 20(1), pages 99-127, January.
    10. Boulanouar, Zakaria & Alqahtani, Faisal & Hamdi, Besma, 2021. "Bank ownership, institutional quality and financial stability: evidence from the GCC region," Pacific-Basin Finance Journal, Elsevier, vol. 66(C).
    11. Olufemi Adewale Aluko & Oladapo Fapetu & Julius Oyebanji Ibitoye, 2021. "Do Openness and Democracy Deepen Banking Sector in Sub-Saharan Africa?," Global Business Review, International Management Institute, vol. 22(2), pages 279-289, April.
    12. Sèna Kimm Gnangnon, 2019. "Effect of Export Upgrading on Financial Development," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 10(03), pages 1-37, October.
    13. Imam, Patrick & Kpodar, Kangni, 2016. "Islamic banking: Good for growth?," Economic Modelling, Elsevier, vol. 59(C), pages 387-401.
    14. Khan, Abdullah & Rizvi, Syed Aun R. & Ali, Mohsin & Haroon, Omair, 2021. "A survey of Islamic finance research – Influences and influencers," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).
    15. Izzeldin, Marwan & Johnes, Jill & Ongena, Steven & Pappas, Vasileios & Tsionas, Mike, 2021. "Efficiency convergence in Islamic and conventional banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 70(C).
    16. Gagari Chakrabarti, 2022. "Openness and Potential Fragility of the Global Banking System," India Studies in Business and Economics, in: Supravat Bagli & Gagari Chakrabarti & Prithviraj Guha (ed.), Persistent and Emerging Challenges to Development, chapter 0, pages 351-370, Springer.
    17. Luo, Yun & Tanna, Sailesh & De Vita, Glauco, 2016. "Financial openness, risk and bank efficiency: Cross-country evidence," Journal of Financial Stability, Elsevier, vol. 24(C), pages 132-148.
    18. Olufemi Adewale Aluko & Muazu Ibrahim, 2020. "On the macroeconomic determinants of financial institutions development in sub-Saharan Africa," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 67(1), pages 69-85, March.
    19. Dibooglu, Sel & Cevik, Emrah I. & Tamimi, Hussein A. Hassan Al, 2022. "Credit default risk in Islamic and conventional banks: Evidence from a GARCH option pricing model," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 396-411.
    20. Alqahtani, Faisal & Mayes, David G., 2018. "Financial stability of Islamic banking and the global financial crisis: Evidence from the Gulf Cooperation Council," Economic Systems, Elsevier, vol. 42(2), pages 346-360.

    More about this item

    Keywords

    Trade openness; Financial openness; Islamic banks; Z-score; Distance-to-Default;
    All these keywords.

    JEL classification:

    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:mulfin:v:62:y:2021:i:c:s1042444x21000177. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/mulfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.