Banking Crises and Economic Downturns: A Comparison between Islamic and Conventional Banks

This paper examines the effects of currency and banking crises on economic downturns in North Africa and GCC countries based on a Financial Stress Index (FSI). The paper identifies episodes of financial turmoil according to FSI values, and proposes an analytical framework to assess the impact of financial stress - in particular the effect of Islamic banks distress and conventional banks distress - on the economic downturn. It concludes that financial turmoil characterized by banking distress is more likely to be associated with severe and protracted downturns than stress mainly in securities or foreign exchange markets. Furthermore, the contribution of Islamic banks in the FSI is -against all odds- no less important compared to conventional banks in the financial system mainly during the last world financial crisis.