The Stability of Islamic Banks vs Conventional Banks during Economic Crisis

The global financial crisis exposed conventional banks' vulnerabilities, sparking interest in Islamic banking as a viable alternative. The financial crisis provided an excellent opportunity to compare Islamic and conventional banks; yet, the literature has been divided on whether the banking model is more stable. With the current global health crisis, we have another opportunity to test the stability of the two banking models and determine if banks have learned from the previous crisis by implementing the reforms that were put in place. We investigated the stability of both banking models in economic crises from 2007 to 2022, namely the global financial crisis and the global health crisis. The study's sample contains 220 banks from 21 OIC nations, including Islamic and conventional banks. The paper uses panel data. We use pooled ordinary least-squares to control heteroscedasticity after applying other robust methods. We employ the z score, a widely used measure of stability in the literature; we also control for several internal and external variables. Using the pooled Ordinary least square method we find that conventional banks are more stable than Islamic banks during the non-crisis period, the global financial crisis and the global health crisis. When compared to the non-crisis period, the study reveals that conventional banks were less stable throughout the global financial crisis. During the global health crisis, we find that conventional banks' stability increased and that conventional banks have become more stable during economic crises.