Regulatory capital and stability of Islamic and conventional banks

Purpose - The purpose of this paper is twofold. First, it attempts to determine the factors that influence the stability of Islamic and conventional banks. Second, it focuses on the relationship between the regulatory capital and bank soundness. Design/methodology/approach - Thus, the authors use the Z-score to assess the stability of Islamic and conventional banks operating in the Middle East and North Africa region over the period 1999 to 2014. Findings - The comparative analysis reveals that Islamic banks seem to be less stable than their conventional peers. With regard to the determinants of bank stability, the findings suggest that the regulatory capital represents the primordial factor that reinforces the soundness of banking systems. The authors also find that bank stability depends on both bank-specific variables as well as macroeconomic and institutional variables. Interestingly, the corruption level turns out to have a significant negative effect on financial strength in the both types of banks. Originality/value - The authors believe that investigating the relationship between regulatory capital and the failure risk in a comparative study between Islamic and conventional banks deserves a particular attention and looks very interesting because it will allow them to identify the difference between the factors explaining the failure risk of each type of banks. The authors also believe that the analysis of the relationship between corruption and bank stability is very interesting because corruption can be seen as an example of moral hazard which forces Islamic banks to use non-PLS instruments.