The drivers of financial vulnerability and profitability: evidence from conventional and Islamic banks in Islamic finance-oriented countries

Purpose - This study aims to investigate the determinants of banking stability in the case of QISMUT + 3 countries (Qatar, Indonesia, Malaysia, United Arab Emirates, Turkey, Pakistan, Kuwait and Bahrain). Both profitability of banks and non-performing loans were treated as dependent variables. Three variations are examined, the sample as a whole and separated to conventional banks (CBs) and Islamic banks (IBs). Design/methodology/approach - Data from 208 banks, both IBs and CBs, were used from 2011 to 2018, after global financial crisis period. Two-step system generalized methods of moments and both feasible least squares and panel-corrected standard error models were used to ensure test the data. Findings - Results suggest that both financial vulnerability and profitability affect each other in both banking systems. In addition, capital adequacy has a positive link with both dependent variables. Corruption varied and followed expectations but for the case of CBs alone with an unexpected negative relationship with profitability. Practical implications - The findings are expected to help bankers, investors, academics and policymakers gain a better understanding of Islamic banking. The findings would be useful in developing policy for the development of the banking industries in these countries. Originality/value - This study contributes to existing literature in three ways. First, this study investigates the factors influencing banking non-performing loans for a new class of countries – QISMUT + 3 within 2011–2018 period. Second, only a few studies use such a period, which is after the global financial crisis period. Finally, new indicators are used to determine the non-performing loans and profitability of both types of banks, such as Muslim Share and Share of IBs.