Competition, Banking Stability and Growth: Evidence from the dual banking system in OIC countries

This study tests the proposition that the Islamic banks are more stable and profitable, especially during the crisis period and tests the impact of competition on both the Islamic and conventional banks using array of measures including the recently developed Boone index in OIC countries. The results can be summarized as follows. First, increase in share of Islamic banks assets increases the overall stability of banking sector. Second, Islamic banks are more stable as compare to their conventional peers but the profitability measures shows that the both the banks are same. This finding is in sharp contradiction with the theoretical standing of Islamic banks being more profitable. This may be due to the significant divergence of Islamic banks from the theory as it is supposed to operate on the risk sharing arrangement. Third, competition has similar effects on stability and profitability on both the banks. Fourth, Islamic banks did better in terms of profitability during the crisis as compare to conventional banks. It also suggests that the Islamic banks were more stable during the crisis period. Finally, we provide evidence of complimentary effect of Islamic and conventional banks in influencing the income per capita suggesting that the co-existence of both the banking system is rewarding for the economies.