Are Islamic Banks More Resilient during Financial Panics?

IMF Working Papers, February 26, 2015

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Rapid growth of Islamic banking in developing countries is accompanied with claims about its relative resilience to financial crises as compared to conventional banking; little empirical evidence exists.
Using data from Pakistan, where Islamic and conventional banks co-exist, the study compares these banks during a financial panic.
Main empirical results:
- Islamic bank branches are "less prone to deposit withdrawals during financial panics," both unconditionally and after controlling for bank characteristics.
- The Islamic branches of banks that have both Islamic and conventional operations tend to "attract (rather than lose) deposits during panics," which suggests a role for religious branding.
- Islamic bank branches grant more loans during financial panics.
- Islamic bank lending decisions are "less sensitive to changes in deposits."

Religious branding is identified as a potential channel: branches with Islamic branding within mixed banks attract deposits in panics.
The observed behavior implies that "greater financial inclusion of faith-based groups may enhance the stability of the banking system."

Consider policies that support financial inclusion of faith-based groups as a means to enhance banking system stability.
Account for the different liquidity and lending behaviors of Islamic bank branches when designing crisis management, liquidity provision, and resolution frameworks.

Subject: Asset and liability management, Bank credit, Banking, Commercial banks, Financial crises, Financial institutions, Financial services, Islamic banking, Liquidity, Loans
Keywords: AIslamic operations, bank characteristic, bank health index, Bank Run, branch network, CAMEL-type bank fundamentals, Commercial banks, discipline bank management, Do bank fundamentals, Financial panic, Global, Islamic bank, Islamic Banking, Liquidity, Liquidity crisis, liquidity shock, Loans, parent bank fragility, WP