Have Islamic Banks Been More Resistant than Conventional Banks to the 2007-2008 Financial Crisis?

Khawla Bourkhis and Mahmoud Sami Nabi

Have Islamic banks been more resistant than conventional banks to the 2007-2008 financial crisis?

Khawla BOURKHI
%.3, 4ousse' Tunisia

!ahmo"# ami $%BI

532% 6 Tunisia 7olytechnic 4chool' 8niversity of 4ousse#%.3, and 391

November 2010

Abstract. The recent global financial crisis has induced a series of failure of many conventional banks and led to a renewal of Minsky (198 !"s critics about the inherent instability of the fractional#reserve banking$ %n this conte&t' many economists advocate for the return to narrow banking and(or for favoring the develo)ment of %slamic banking su))osed to be more resilient to the financial crises$ This )a)er attem)ts to answer em)irically the two following *uestions: i) Have Islamic banks (IBs) been more resistant than their conventional peers (CBs) to the 2007-2008 inancial crisis! ii) Co"l# the presence o Islamic banks in a conventional bankin$ s%stem enhance the overall s%stemic stabilit%! The main findings are the following$ +efore the financial crisis' %+s were more )rofitable than ,+s$ Then' in 200-#2008' only the large %+s remained more )rofitable than the large ,+s$ .owever' %+s became less )rofitable in 2009 when the crisis"s )ass#through to the real economy had sufficiently increased$ Moreover' we show that ,+s were more resistant to the crisis than %+s$ .ence' %+s illustrated a degree of resilience and stability during the first (financial! wave of the crisis$ .owever' they have been im)acted during the second (real! wave because of their higher e&)osure to real estate and their limited reliance on risk sharing instruments$ Nevertheless' we find a )ositive e&ternality of large %+s on the soundness of large ,+s which could be /ustified by their asynchronous reactions to the crisis$ &e% 'or#s0 %slamic +anking' ,onventional +anking' 1inancial ,risis ()* Classi ication0 201' 221'

&' Intro#"ction 4ome economists argue in the line of Minsky (198 ! theory' that the conventional banking system is inherently unstable$ :ccording to ;e 2rauwe (2009! the reforms im)lemented since the 19<0s in order to enhance the stability of the banking system and )revent large scale banking crises (central bank"s lender of last resort role' de)osit insurance mechanism' banks" ca)ital regulation! have shown their limits$ .e argues that the solution is narrow banking where banks act as money market funds which use the sight de)osits they collect to buy riskless financial securities$ Meanwhile' the traditional role of transforming de)osits to loans should be assigned to financial firms (investment banks! involved in financial markets with close matching of the average maturities of their assets and liabilities$ .owever' ;e 2rauwe (2009! recogni=es the difficulty to im)lement this solution since it necessitates a co#o)erative international a))roach in order to avoid the free#rider )roblem0 >'hen onl% one or a e+ co"ntries ret"rn to narro+ bankin$, the banks o these co"ntries +ill ace a competitive #isa#vanta$e?1$ Moreover' Miles (2001! argues that the
investment banks under a narrow banking system will suffer from high agency costs and )rovide a less stable su))ly of credit relative to de)osit#insured banks$

:ccording to :l @arhi (200A! narrow banking bears similarities with %slamic banking when the relationshi) between savers and banks are considered$ %ndeed' %slamic banks (%+s! collect funds through two categories of de)osits0 demand de)osits and investment de)osits$ Bhile demand de)osits are )erfectly guaranteed and yield no return' investment de)osits are similar to mutual fund shares$ .owever' the two banking a))roaches are distinct relatively to the financing instruments$ More )recisely' %slamic banks have develo)ed interest#free financing instruments based on two )rinci)les0 7rofit and 5oss 4haring (754! and marku) )rinci)le (Cahar and .assan' 2001D .assan et al$' 200<!$ Many economists (Ehan' 198-D :hmed' 2002D ,ihak and .esse' 2008! argue that the 754 mechanisms avoid the deterioration of %+"s balance sheets in the case of difficult economic situations$ %ndeed' the 754 allows the %+ to transfer the credit risk from its asset side to its liability side (the investment de)osits!$ .owever' in )ractice' %+s all over the world rely more on debt like financing on their assets side rather than 754 based financing instrument (4iddi*ui' 2008!$ Therefore' it is interesting to analy=e whether %+s were more resilient than their conventional banks (,+s! to the recent global financial crisis$ The 200-(2008 financial crisis which started as a credit shock has induced a series of failure of many conventional banks' as witnessed by the colla)se of +ear 4tearns$ :ccording to the F,;3 (2010! this crisis has shown that banks" funding structure is im)ortant to their resilience$ More )recisely' the re)ort argues that banks relying mostly on wholesale funding (i$e$ funding from other banks' money market funds' cor)orate treasuries and other non#bank investors! have been severely affected by the crisis$ :t the o))osite' banks which relied mostly on de)ository funding have been very resilient to the crisis$ ,ould we e&tra)olate these styli=ed facts and conclude that %+s were more resilient to the recent financial crisisG :ccording to 4hamshad :khtar2' although %+s have illustrated a degree of resilience and stability' they have been im)acted by the crisis because of their higher e&)osure to real estate and their limited reliance on risk sharing or e*uity based transactions$ .asan and ;ridi (2010! addressed the resilience of %+s relatively to ,+s during the recent global financial crisis$ They have analy=ed the effects of the crisis on )rofitability' credit growth' asset growth and e&ternal ratings of 120 %slamic and conventional banks in 8 countries$ They found that
1 2

;e 2rauwe (2009!' )age 2<$ The Hice#)resident of the Borld +ank for M3N: in his s)eech during the >4ym)osium on %slamic 1inance in 9oma0 ;evelo)ments in M3N: region?' +ank %talia' 9ome' %taly' November' 11th' 2009$

%+s" showed stronger resilience in the early stages of the crisis$ .owever' as the crisis moved to the real economy in 2009' %+s" )rofitability has stee)ly declined relatively to the ,+s$ They conclude that %+s contributed to financial and economic stability during the crisis' given that their credit and asset growth was at least twice as high as that of ,+s$ :lthough the study )rovides a useful analysis for the com)arison of the effects of the financial crisis on %+s relatively to ,+s' it didn"t tell us much about the financial stability"s change of the two ty)es of banks$ To our knowledge' ,ihak and .esse (2008! is the only study that addressed the stability of %+s relatively to ,+s in a cross#country analysis during the )eriod 199<#200A$ They found three main results0 (i! small %slamic banks tend to be financially stronger than small conventional banksD (ii! large conventional banks tend to be financially stronger than large %slamic banksD and (iii! small %slamic banks tend to be financially stronger than large %slamic banks$ These results were obtained by the a))lication of the C#score methodology$ This )a)er attem)ts to answer em)irically the two following *uestions: i) Have Islamic banks been more resistant than their conventional peers to the 2007-2008 inancial crisis! ii) Co"l# the presence o Islamic banks in a conventional bankin$ s%stem enhance the overall s%stemic stabilit%! To answer these *uestions we use two a))roaches$ The first one is a non )arametric analysis of the financial crisis"s im)act on a set of 1inancial 4oundness %ndicators (14%! related to the banks" earnings and )rofitability' ca)itali=ation' asset *uality' efficiency and li*uidity$ The second a))roach (based on an econometric model and the C#score methodology! is similar to that of ,ihak and .esse (2008!$ Moreover' we consider the same sam)le which is com)osed of A0- banks from 19 countries$ .owever' we e&tend the analysis )eriod to 2009 which enables us to assess the crisis"s effects on the financial stability of %+s and ,+s$ %ndeed' we consider three sub#)eriods0 199<#200 (before the crisis!D 200-#2008 (during the crisis! and 2009 (after the crisis!$ 1urthermore' we control for the effect of the institutional environment by using si& governance indicators com)iled by Eaufmann et al (2010!$ The main findings derived from the first a))roach are the following$ +efore the financial crisis' %+s were more )rofitable than ,+s$ Then' in 200-#2008' only the large %+s remain more )rofitable than the large ,+s$ .owever' %+s become less )rofitable in 2009 when the crisis )ass#through to the real economy has sufficiently increased$ The most im)ortant results stemmed from the second a))roach are the following$ 1irstly' ,+s tend to be financially stronger than %+s$ 4econdly' ,+s were more resistant to the crisis than %+s$ +esides' large %+s were more resilient to the crisis than small %+s$ 1inally' contrarily to ,ihak and .esse (2008! we found that the )resence of large %+s has a )ositive im)act on the soundness of large ,+s$ The rest of the )a)er is organi=ed as follows0 4ection %% )rovides an overview of the strengths and weaknesses of %+s in terms of financial stability$ 4ection %%% assesses the im)act of the crisis using a non )arametric a))roach a))lied to a set of soundness indicators$ 4ection %H assesses the resilience of %+s relatively to ,+s during the crisis using the C#score risk measure and )anel data analysis$ 1inally' 4ection H% summari=es the main conclusions and )rovides )olicy recommendations$ 2' Islamic Banks an# financial stabilit() stren*ths an# weaknesses 5indgren et al (199 ! define bank soundness as the ability of the bank to withstand adverse events such as bank run' ma/or )olicy changes' financial sector liberali=ation and natural disaster$ .ence' it reflects the bank ca)acity to be solvent and remain so under difficult economic conditions by means of their ca)ital and reserve accounts$ %n this section we will analyse the %+s" financial soundness relatively to ,+s$

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2.- Islamic Banks. /tren$ths :ccording to +ryant (1980! and ;iamond and ;ybvig (198<!' traditional banks are inherently unstable since they are de)osit#taker institutions$ %n fact' under ordinary circumstances' banks do not e&)ect that all de)ositors demand their money back at the same time$ This de)ends on their individual needs of li*uidity$ Thereby bank can make loans over long hori=ons even if all de)ositors have the right to withdraw at any time' by kee)ing a small amount of cash in hand$ 8nless the individual e&)enditures needs are largely uncorrelated' de)ositors attem)t to withdraw their money simultaneously$ %n such situation' bank cannot )ay all the de)ositors *uickly because of its illi*uid assets (business' mortgage loans$$$!$ %t )ays the first in line while the last one will be left with nothing<$ This uncertainty about bank"s ability to re)ay immediately can lead to a bank run situation$ Therefore' due to the maturity mismatch between assets and liabilities' healthy banks are )otentially vulnerable to bank )anics$ .owever' many argue in line of Ehan (198-! that the theoretical models of %slamic banks can successfully fill the failure of conventional banks in maintaining stability$ %n fact' %slamic banks should se)arate investment funds from the demand de)osits and must a))ly 100I reserve on the latter$ +anks can either sell currency or 2overnment %nvestment ,ertificate$ .ence' demand de)osits cannot )artici)ate in the creation of money because de)ositors don"t wish to share bank risks$ They want to kee) it intact in order to )ay their e&)enditures$ Therefore' maintaining 100I reserve removes the risk of bank )anics and )romotes the )ayment system efficiency$ Ehan (198-! has e&)lained that %slamic banking model isnJt unfamiliar with the economic literatureD 4imons (19A8! and 1riedman (19 9! have already suggested a similar banking model to avoid bank run$ The 754 )rinci)le )lays also a critical role in kee)ing financial stability$ :s a financial intermediary institution between ca)ital sur)lus and ca)ital deficit agents' %slamic banks channel investment de)osits into 754 loan (Mudharabah and Musharakah!$ 2iven that neither the )rinci)al nor the return of the investment de)osits are guaranteed' any loss occurred on the asset side is totally absorbed on the liability side$ Thus' if the value of assets decreased' the value of the liabilities decreased res)ectively$ Therefore' the 754 )rinci)le allows the bank to maintain its net worth under difficult economic situations$ (Ehan' 198-D :hmed' 2002D 4yed' 200-D ,ihak and .esse' 2008!$ 1inally' :hmed (2002! argues that the )rohibition of 9iba and the linkage with the real economy )rinci)le could )revent the financial crises$ %n fact' financial assets and derivatives based on other debt financial assets cannot be traded$ 4o' there is no )lace for s)eculative behaviour that leads to instability like what is ha))en in the last 8$4 sub)rime crisis$ 2$2 Islamic Banks. 'eaknesses %+s may lose their com)arative advantages against their conventional )eers due to the deviations of the current )ractices from the theoretical model$ %n )articular' the mimicking of ,+s may raise multi)le risks that are not assumed to be for %+s$ The first deviation is in the com)osition of balance sheet$ %n a ty)ical %+' more than 80I of total assets are fi&ed income and short term maturity assets$ Bhile' only 20I are dedicated to long term and risk sharing investments$ 3l# .awary (200-! and 2reuning and %*bal (2008! claim that the dominance of less risky' low return assets de)rives the bank of the benefits of the )ortfolio diversification' as Mudarabah and Mushrakah contracts are more )rofitable$ :nalysts e&)lain this behaviour by the fact that sale # based transactions are less associated with moral ha=ard and adverse selection )roblems than 754 investments (4iddi*i' 200 !$ %n fact' the latter need additional effort to ca)ture good investment
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;e)ositors may demand their de)osits only because they e&)ect that other de)ositors do so$ Then' all de)ositors have the incentive to be the first in line to make withdraws$

o))ortunities and to analyse )ro/ects ade*uately$ +esides' %slamic banks cannot re*uest for collateral to reduce credit risk$ Thus' risk sharing investments re*uire a high level of confidence and trans)arency between investors' banks and de)ositors$ The second divergence with the %slamic banking theory is in the income distribution$ %n some cases' the %slamic banks distribute )rofits to the investment de)ositors even when they accrue loss' so the )rofits are )aid out of e*uity$ This )henomenon is the dis)laced commercial risk (3l# .awary' 200-D 2reuning and %*bal' 2008!$ Therefore' the current )ractices don"t make a clear differentiation between shareholders and investment account holders rights"$ 1inally' %+s may not fully res)ect 4hariah )rinci)les in their activities$ 4uch behaviour makes them vulnerable to risks normally born by the )eers$ 1or instance' ,hong and 5iu (2009! claim that Malaysian banks are not very different from traditional banks in the ado)tion of the 754 )rinci)le$ +' $on ,arametric anal(sis of the financial crisis effects on IBs an# -Bs so"n#ness In#icators 0.- 1etho#olo$%, variables #e initions an# #ata %n this section' we try to analyse the financial crisis effect on %+s and ,+s soundness indicators belonging to the following categories (ca)ital ade*uacy' earnings and )rofitability' asset *uality' efficiency and li*uidity!$ More )recisely' we )erform inter#tem)oral and inter#bank com)arisons' using the e*uality of mean test (4amad' 200AD %ka' 2008!$ The inter#tem)oral com)arison is useful in order to know how the %+s and ,+s behave before (199<#200 !' during (200-#2008! and after (2009! the recent global financial crisis$ :s for the inter#bank com)arison it enables us to com)are banks" indicators between the two categories of banks during each sub#)eriod se)arately$ Most of the indicators we consider are )art of %M1 1inancial 4oundness %ndicators A (14%! and will be )resented consecutively$ ,a)ital :de*uacy0 %t is measured by the Capital to asset ratio. :ccording to +le/er et al (199-!' banks are on their toes when they have a reasonable level of ca)itali=ation (ca)ital to risk#weighted assets ratio! and a satisfactory level of solvency and li*uidity$ .ence' higher the ca)ital ratio' stronger is the bank$ 3m)irically' 2aganis et al (200 ! suggest from a sam)le of 89A ,+s from 9- countries that ca)itali=ation' asset *uality and market where banks o)erate are the most im)ortant criteria for identifying the bank"s soundness$ ,a)itali=ation in %slamic banking has been the sub/ect of conflicting o)inions$ Fn the one hand' due to the originality of investment de)osit accounts' %+s do not need to maintain a high ca)ital ratio$ Fn the other hand' a high level of shareholders e*uity is desirable in order to reduce conflict of interest between owners and investment de)osit holders$ 1urther' :inley (2000! considers that regulators should im)ose higher ca)ital ratio for %slamic banks since assets are long term and illi*uid$ 3arning and )rofitability0 +anks cannot be )ermanently solvent if they are not )rofitable$ .igh earnings are necessary to im)lement investments and make full )rovision for the absor)tion of losses$ Maechler et al (200-! show that )rofitability is negatively related to the )robability of insolvency$ :mong the mostly used )rofitability indicators we will use the following two measures0 9eturn Fn :verage :ssets (9F::! and 9eturn Fn :verage 3*uity (9F:3!K$ 8sing si& )rofitability ratios' Flson and Coubi (2008! find that %slamic banks are more )rofitable than conventional banks$ :sset Luality0 .igh level of assets that are not generating income reduce the bank"s ca)acity to honor its liabilities$ 8sing 73: ()rovision to earnings assets! and :75 (ade*uacy
A K

4ee 1inancial 4oundness %ndicators ,om)ilation 2uide '%M1 (200 !$ These measures should not be inter)reted se)arately from other bank characteristics such as ca)ital structure$

of )rovision for loans! as indicators of asset *uality in a sam)le of 2<- observations for banks o)erated in the 2,, region over the )eriod 2000#200K' Flson and Coubi (2008! find that %+s kee) u) lower )rovisions for )ossible loans losses than ,+s$ This can be e&)lained by two ways0 either %+s concentrate their activities on less risky contracts' or they o)erate with greater risk$ 1actors that )rovoke high level non# )erforming loans constitute the focus of the investigation of +oudriga et al (2010!$ %n a sam)le of K9 countries over the )eriod 2002#200 ' they find that higher ca)ital ade*uacy ratio and )rudent )rovisioning )olicy lead to lower rate of non#)erforming loans$ Moreover' banking market concentration and the )resence of foreign banks ownershi) are )robably associated with low level of bad loans$ :lthough' :sset classification and )rovisioning entail much more than sim)ly looking at amounts overdue' 5oan 5oss 7rovision and Non#)erforming 5oans to gross loans are often used as a )ro&y for asset *uality of an individual bank$ %n this )a)er we consider the following )ro&ies of asset *uality0 2et loans to total assets (N5(T:!, 2et loans to #eposits (N5(;!, 2on per ormin$ loans to $ross loans (N75(25!, *oan loss provision to net interest reven"e (557(N%9!. 5i*uidity0 *i3"i# assets to total assets ratio, *i3"i# assets to #eposits ratio are the two measures of li*uidity we consider in this )a)er$ 5i*uid assets refer to cash and its e*uivalent that are easily convertible to cash at any time without significant losses$ 3fficiency0 Cost to income ratio is used as a )ro&y of efficiency$ %t measures the bank"s o)erating costs (salaries' technology' administrative e&)enses' etc! as a )ro)ortion of its total income$ These 10 ratios are calculated using the banks balance sheets which are were drawn from the +anksco)e database' )rovided by bureau Han ;i/k$ %n this study' we focused only on fully fledged %slamic and conventional banks and we used unconsolidated bank statements whenever consolidated statements are not available$ Fur sam)le is constituted of A %+s and <A< ,+s from 19 countries where %+s" assets account more than 1I of the total banks" assets at least in one year in the )eriod of analyse (199<#2009!$ 0.2 4es"lts ,a)ital :de*uacy

1igure 1 illustrates the evolution of the ca)ital to asset ratio between the three sub# )eriods for %slamic and conventional banks$ 1or %+s' the ca)ital to assets ratio decreased from 2<$21I before the crisis to 18$K2I during the crisis )eriod and continued to dro) down to 1 $K2I in 2009$ :s shown in Table 2 there is a significant difference between the ratio"s levels before and after the crisis$ .owever' for the ,+s the ca)ital to asset ratio seems to be constant during the three sub# )eriods$ The t#test of e*uality of means )rovided in Table < shows that the 200-#2008 financial crisis did not affect the level of ca)itali=ation of ,+s as a )ool$ .owever' ca)ital to assets ratio of the large ,+s increased significantly after the crisis$ Table A shows that during the )re#crisis and the crisis )eriods' the ca)ital to assets ratio for %+s was larger than for ,+s at the 1I level of risk and only at the 10I level in 2009$ Thus' according to this indicator' %+s have higher level of solvency $

+ahrain' +angladesh' +runei' 3gy)t' 2ambia' %ndonesia' %ran' @ordan' Euwait' Malaysia' Mauritania' 7akistan' 7alestinian Territory' Latar' 4audi :rabia' 4udan' Tunisia' 8nited :rab 3mirates and Memen$

3arnings and 7rofitability

1igures 2 shows that the mean of 9F:: for %+s (CBs) vary between A$0 (-.78! and #1$1K (-7.56! over the )eriod of study$ The lowest )oints were attained in (199-#1998! which corres)ond to the 3ast#:sian financial crisis$ The 9F:: for %+s decreased significantly after the financial crisis )assing from 2$8- in 200- to #1$0 in 2009$ ,oncerning the 9F:: for ,+s' it recorded a slight decrease since 200-' but it was stable on average (Table <!$ 1igure < shows that the mean of 9F:3 for %+s (CBs! vary between <0$K- (-8.7-! and # $1A (-8.86! over the )eriod of study$ The lowest )oints were attained simultaneously in 1999$ The 9F:3 for %+s increased significantly in 200- (it was in order of 1A$K< against A$K< in 200 !$ 4ince 2008' The 9F:3 for both %+s and ,+s had decreased significantly (Tables 2 and <!$ Table K shows that before the crisis' %+s were more )rofitable (9F::! at the 10I level of risk$ This result confirms the findings of the )revious researches such as Flson and Coubi (2008!$.owever' there is no significant difference in the )rofitability between the two ty)es of banks during the crisis )eriod$ +ut if we focus on the bank si=e criteria (table !' we note that large %+s (total assets N 1 billion O! were more )rofitable than large ,+s during the same )eriod$ This result suggests that large %+s resisted more during the crisis but they *uickly lost this advantage since %+s become less )rofitable in 2009$ :sset Luality

1igures A and K show that Net 5oans to Total :ssets ratio (N5(T:! for %+s declined from K0'<<I to A8'98I in the financial crisis )eriod' then it grew to be in order of K2'-9I$ 4imilarly' Net 5oans to ;e)osits ratio (N5(;! sli))ed from 88I to 8KI in the financial crisis years (200-#2008!' and then it went u) to 92'2-I$ 1ocusing now on the ,+s' the N5(T: increased constantly from K2'-AI to K<'92I and KA'--I during and after the financial crisis' res)ectively$ %n contrary' the N5(; decreased from --I in (199<#200 ! to -2I in 2009$ The Non)erforming 5oans to 2ross 5oans ratio (N75(25! decreased during the 200-#2008 and increased in 2009 for both %+s and ,+s$ The 5oan 5oss 7rovision to Net interest 9evenue ratio (557(N%9! had fallen from 2 '11I to 19'19I in the (200-#2008! )eriod' then it increased shar)ly in 2009 to attain 2' 1I$ .owever' for the ,+s the 557(N%9 increased during the crisis and decreased in 2009$ Thus we could say that that the )rovisioning behaviour of ,+s is forward#looking whereas %+s increased their )rovisioning in res)onse to the increasing of N75(25$ Table - shows that before and during the financial crisis' N5(T: is significantly larger for the ,+s$ Therefore' %+s are less )rone to credit risk$ ,oncerning the intermediation activity' N5(; is larger for %+s over the )eriod of study$ %ndeed' the %+s of our sam)le convert a high )ro)ortion of their de)osits (more than 80I! in loans$ ,oncerning the ,+s they look for more li*uidity by investing a large amount of their de)osits in li*uid instruments$ +efore the financial crisis' N75(25 is smaller for %+s$ This can e&)lain why %+s were more )rofitable in this )eriod of time$ +esides' the 557(N%9 is significantly different between the two ty)es of banks during and after the financial crisis )eriod$ 3fficiency

1igure 8 )rovides a com)arison of the efficiency ratio between %slamic and conventional banks$ %+s had a higher efficiency ratio (more than 0I! in the three sub#)eriods$ .owever' the ,+s a))eared more efficient (about K0I!$ ;e)ending on the results re)orted Tables 2 and <' the global financial crisis didn"t affect significantly the efficiency level neither for %slamic nor for conventional banks$ 1rom Table 8 it is clear that before and during the financial crisis' %+s were

less efficient than the ,+s at the 1I and KI level of risk res)ectively$ This result is in line with the results of .ammim et al (200 ! and ,ihak and .esse (2008!$ 5i*uidity

1igure 9 and 10 show that the li*uid assets to total assets ratio (5:(T:! and li*uid assets to de)osits (5:(;! decreased during and after the financial crisis for ,+s$ Table 9 shows that before and during the crisis 5:(T: is larger for ,+s at 1I and 10I level of risk res)ectively$ ,ontrarily to ,+s' the decreasing of li*uidity of %+s occurs after the financial crisis$ This result confirms the e&istence of a different channel of transmission of the financial crisis to %+s$ %t is well known that the ,+s of develo)ing countries were e&)osed to li*uidity )roblem namely at the international interbank market$ .' Have IBs been more resistant than -Bs to the 2007-2008 financial crisis? a /anel #ata anal(sis 8.- 1etho#olo$% an# variables #e initions The second a))roach of our analysis focuses on calculating the C#score ratio as a )ro&y for the individual bank"s financial soundness$ %t is denoted as follows0 C 9 ( : &); where denotes the bank"s average return on assets (9F:!' & the e*uity ca)ital in )ercent of total assets and is the standard deviation of the 9F: as a )ro&y for return volatility$ C#score is a )o)ular measure of bank soundness since it is inversely related to the )robability of bank"s insolvency$ : higher C# score corres)onds to a lower u))er bond of insolvency risk$ %ndeed' the )robability of insolvency is defined as the )robability that losses e&ceed e*uity ) i$e$

:ccording to ;e Nicolo (2001!'

8nder the assum)tion of normality of bank"s return' the =#score can be inter)reted as the number of standard deviations below the mean by which )rofits would have to fall in order to de)lete e*uity$ Be construct the C#score for each bank i at time t in country /$ +ased on )anel data analysis' we estimate an e&tend version of ,ihak and .esse (2008!"s econometric model that controls for the bank s)ecific variables' industry s)ecific variables and macroeconomic variables0

Table 10 )resents the variables" definition and data sources$ %n order to e&amine the first hy)othesis 0H&1 IBs are stron$er than the CBs' we include a dummy variable (T! that takes the value of 1 if the bank in *uestion is %slamic' 0 if it is conventional$ 1or instance' if %+s are less strong' the dummy variable should take a negative sign in the regression analysis$ 4econd' we would like to test the second hy)othesis (.2!0 the presence o IBs enhances the overall bankin$ s%stemic stabilit%$ 1or this )ur)ose' we calculate the share of %+s in terms of total assets for each year and country and interact it with conventional and %slamic dummy variables res)ectively (T 1 and T2!$ Then' we interest on the third hy)othesis (.<!0 IBs +ere more resistant to the 2007-2008

inancial crisis than CBs$ Be include a dummy variable (7! that takes value of 1 if the year in *uestion belongs to the crisis )eriod' and interact it with both %slamic and conventional banks dummies$ Bhen e&amining the banks" financial soundness' it is im)erative to control for macroeconomic variables (2;7 growth rate' inflation rate' and e&change rate de)reciation!$ Be also have to control for the institutional environment$ To this end we construct inde& ()er year and country! by averaging the following governance indicators com)iled by Eaufmann et al (2010!0 voice and accountability' )olitical stability' government effectiveness' regulatory *uality' rule of law and control of corru)tion$ To take into account the im)act of market concentration on the financial stability' we use the .erfindahl#.irschman %nde& (..%!-$ The above linear model is conducted using the 9andom#3ffect 2enerali=ed 5east 4*uares estimation to test our three hy)otheses$ +ased on unbalanced )anel data' three models are analysed0 none effect model' fi&ed effect model and random effect model$ The best model is selected based on the .ausman test$ To overcome the )roblem of heteroscedasticity in the data' we )erform a robust regression techni*ue$ %n order to ca)ture )ossible )ast effect' we lag by one year all the bank s)ecific and macroeconomic variables' the .erfindahl#.irschman %nde& and the interaction of %slamic banks" share with %slamic and conventional banks dummies$ Be test the lagged effect by com)aring estimation using lagged variables with estimation using contem)oraneous variables$ 8.2 4es"lts 7airwise ,om)arisons

Table 11 indicates' firstly' that the C#score dis)lays a high variation for both %+s and ,+s across countries and over time$ %t is from #11'-K (-8,13) to 101A'9< (300, 87) for the conventional (Islamic) banks$ 1urther' the means of the C#score are e*uals for the two grou)s of banks$ They are of the order of 2<$ Moreover' Tables 12 (a! and 12 (b! show that there is no significant difference in the bank"s financial soundness between %slamic and conventional banks$ :ccording to ,ihak and .esse (2008!' the high variability of the C#score reflects the )resence of outliers which have an im)ortant effect on the results$ 4o' we o)t to e&clude the 1st and 99th )ercentile from the =#score"s distribution and re)eat the )airwise com)arisons$ The data analysis suggests' therefore' that %+s are less strong than ,+s during the three sub#)eriods (before' during and after the 200-#2008 financial crisis!$ %n fact Table 12 shows that for the distribution e&cluding the 1st and 99th )ercentile' C#scores of ,+s are higher on average than those of %+s$ 1igure 11 illustrates the trend for the C#score for the %+s and ,+s$ %n (199<# 2000! )eriod' there is a decrease in the mean of C#score inde& for the two grou)s of banksD and %+s tend to be financially stronger than ,+s$ :fter 2000' the mean of C#score for ,+s im)roves and become larger than for %+s$ :))arently' the 200-#2008 financial crisis has not an im)ortant effect on the banks" financial stability' since there is a slight decrease in our focal variable for the two categories of banks$ 1urther' small %+s tend to be financially stronger than large %+s over the )eriod of financial stability (199<#200 ! (Table 12 (a! and fig 12!$ Be obtain similar results as ,ihak and .esse (2008!$ Met' this relationshi) is reversed during and after the financial crisis )eriod$ 4mall %+s become less strong than large %+s (Table 12 (b! and fig 12!$

;efined as the sum of s*uared market share in terms of total assets of all banks in the country$

9egressions results

The regressions analyses (table 1<! confirm the results of the )airwise com)arison of C#score that bank stability decreases with si=e$ The sign of %slamic dummy variable is always negative and significant at the 10 )ercent level in the regressions (2!' ( ! and (8!$ :s a result' the first hy)othesis is re/ected$ %+s are less financially stable than ,+s$ ,oncerning the bank s)ecific variables' the net loans to total assets ratio does not a))ear significant in all regressions' e&ce)t (8!$ The slo) coefficient of the cost to income ratio is consistently negative$ Then' the more efficient banks are more financially stable (significant at the 1 )ercent level!$ :dditionally' the higher diversification from traditional lending activities to other activities damages the small banks" financial stability (see (10! and (12! s)ecifications!$ The )resence of large %+s in a banking system has a )ositive im)act on the =#score of large ,+s (s)ecification (-!!' whereas the entrance of small %+s lowers the financial stability of small ,+s (s)ecification (11!!$ Therefore' the e&istence of large %+s enhances the systemic stability of the overall banking system (.2!$ 9egarding the governance' it has a )ositive im)act on the large banks" financial stability (see estimation (K!!$ %n all the estimations where ..% is entered show that ..% is negatively correlated with the =#score$ .ence' concentrated markets seem to be more )rone to financial fragility$ 1ocusing now on the effect of the macroeconomic variables on banking risk' we note that 2;7 growth is )ositively related with C#score (s)ecifications (A! and (12!!$ 3&change rate de)reciation and inflation have not a clear linear de)endence with banks" financial stability$ 1inally' the regression analysis confirms the findings of the )airwise com)arisons of the C#score during the crisis )eriod$ 1irstly' ,+s were more resistant to the 200-#2008 financial crisis than %+s (.<! (see the s)ecification (1! and (A!!$ Then' small %+s were negatively affected by the financial crisis com)aring to the large %+s (estimation (9!' (10!' (11! and (12!!$ 2' -oncl"sion The recent global financial crisis has induced a series of failure of many conventional banks and led to a renewel of Minsky (198 !"s critics about the inherent instability of the fractional#reserve banking$ %n this conte&t' many economists advocate for the return to narrow banking and(or for favoring the develo)ment of %slamic banking su))osed to be more resilient to the financial crises$ This )a)er attem)ted to answer em)irically the two following *uestions: i) Have Islamic banks (IBs) been more resistant than their conventional peers (CBs) to the 2007-2008 inancial crisis! ii) Co"l# the presence o Islamic banks in a conventional bankin$ s%stem enhance the overall s%stemic stabilit%! To answer these *uestions we used two a))roaches$ The first one is a non )arametric analysis of the financial crisis"s im)act on a set of 1inancial 4oundness %ndicators (14%! related to the banks" earnings and )rofitability' ca)itali=ation' asset *uality' efficiency and li*uidity$ The second a))roach (based on an econometric model and the C#score methodology! is similar to that of ,ihak and .esse (2008!$ Moreover' we considered the same sam)le which is com)osed of A0- banks from 19 countries$ .owever' we e&tend the analysis )eriod to 2009 which enables us to assess the crisis"s effects on the financial stability of %+s and ,+s$ %ndeed' we considered three sub#)eriods0 199<#200 (before the crisis!D 200-#2008 (during the crisis! and 2009 (after the crisis!$ 1urthermore' we controlled for the effect of the institutional environment by using si& governance indicators com)iled by Eaufmann et al (2010!$ The main findings derived from the first a))roach are the following$ +efore the financial crisis' %+s were more )rofitable than ,+s$ Then' in 200-#2008' only the large %+s remain more )rofitable

10

than the large ,+s$ .owever' %+s become less )rofitable in 2009 when the crisis )ass#through to the real economy has sufficiently increased$ The most im)ortant results stemmed from the second a))roach are the following$ 1irstly' ,+s tend to be financially stronger than %+s$ 4econdly' ,+s were more resistant to the crisis than %+s$ These results confirm that in )ractice' %+s all over the world rely more on debt like financing on their assets side rather than 754 based financing instrument (4iddi*ui' 2008!$ %ndeed' the 754 mechanisms would have enabled the %+s" to avoid the deterioration of their balance sheets in 2009$ Thus' IBs sho"l# #ecrease their e3,os"re to the real estate an# rel( more on risk sharin* instr"ments$ +esides' our results showed that large %+s were more resilient to the crisis than small %+s$ Therefore' this res"lt s"**ests that small Islamic banks sho"l# increase their si4e 0b( mer*ers an# ac5"isitions for e3am,le1 to enhance their resistance to the financial crisis$ 1inally' contrarily to ,ihak and .esse (2008! we found that the )resence of large %+s has a )ositive im)act on the soundness of large ,+s$ .ence' co"ntries sho"l# enco"ra*e the entrance of more lar*e Islamic banks to their bankin* s(stem in or#er to enhance their s(stemic stabilit($ This result could be /ustified by the asynchronous reactions to the crisis of %+s and ,+s which certainly enhances the overall stability of a banking system by reducing the systemic risk$

11

%,,en#i3

6i* &0 ,om)arison of ,a)ital to :ssets ratio

6i* 20 Trend of 9F::

6i* +0 Trend of 9F:3

12

6i* .0 ,om)arison of Net loans to Total :ssets ratio

6i* 20 ,om)arison of Net loans to ;e)osits ratio

6i* 70 ,om)arison of non)erforming loans to gross loans ratio

6i* 70 ,om)arison of 5oan 5oss 7rovision to Net interest revenue

6i* 80 ,om)arison of cost to income ratio

1<

6i* 80 ,om)arison of 5i*uid :ssets to Total :ssets ratio

6i* &00 ,om)arison of 5i*uid :ssets to ;e)osits ratio

6i* &&0 Trend of C#score

6i* &20 ,om)arison of :verage C#score

1A

9able &' Descriptive statistics of the soundness indicators for Islamic and conventional banks re-crisis period( 1!!3-"00#) 1ean /t# 1in 1a< $inancial %risis period( "007-"008) 2 1ean /t# 1in 1a< Capital Adequacy -a,ital : %ssets I&s <11 2+'2&
%&s

ost-crisis period("00!) 1ean /t# 1in 1a<

2-$28 11$9

#A2$91 #- $<9

100 12<$K

109 A 2

&8'22 &+'02

20$91 11$8K

#A-$A #12$0A

99$ A 99$-8

<K 1K-

&7'22 &2'+

1A$9 8$A

A$A9 # $<-

90$0A A$22

181-

&2'&0

Earnings and Profitability RO%%

I&s %&s

<0180< <01-9<

&'78& &'&72 &2'0& &+'8

$ <2 K$ 11 K $9K<$<

# 9$-2 #11<$2 #K-<$< #9-K$<

K<$09 -1$<2 -< $ 98$1A

109 A 2 109 AK9

&'872 &'.82 &2'2& &2'++

K$K2 2$<-1 1A$<K AK$9-

#<0$0#1K$A#A8$8K #2K0$2

<0$8A 20$A<$1K 8K0$2

<K 1K<K 1K-

-&'07 &'2& &'8.2 &&'+7

$1$8 2A$ $2 2

#28$A1 #-$K< #10A #9A$<<

A$9 -$< A<$1A2$8K

RO%;
I&s %&s

Asset Quality $/< : =ross loans

I&s %&s

K9-<

2'.27 &&'77

$-1 1K$-8

0$29 0

<9$A21

A <0

.'772 7'+8

A$10$0-

0$0A 0$1<

22$2K 80$1K

18 108

7'88 7'02

<$9 8$-A

1$29 0$KK

1<$ 2 K9$A

<</ : $et Interest Reven"e I&s 202 27'&& <$KA

%&s

#KK0 #1K8$

<1<$8

8<

&8'&8 +.'77

2 $8K 9<$28

#A1$08 #1K8$

1A $A 92K$8

<0 1A8

72'7& 22'+2

122$1 KK$-8

#-$<8

1K

1 <8

+2'&.

98$ 8

1111$9 A<0

#<9-$< <0<$K<

$et <oans : 9otal %ssets

I&s %&s

<0A 1-99

20'++ 22'7.

22$ 19

0 0

9-$A 1AA$0A

109 AK8

.8'88 2+'82

20$<1 1-$K9

1$99 0$K

98$92 9<$<1

<A 1K-

22'78 2.'77

1-$ 1 1A$K

1$-A$A8

8<$AA -8$A

$et <oans : >e,osits I&s 28< 88'&2

%&s

110$01 0 A$88 0

9< $9A 90 $ <

10K AKK

8.'7 72'8.

9-$82 AK$8 Efficiency

<$28 0$9

-A<$1 2 $1

<A 1K-

82'27 7&'77

88$< <-$-

2$ 2 9$29

A<K$ 8 A-0$0-

1-88

77'82

-ost : Income
I&s %&s

289 1-KK

7+'7+ 2.'8&

K1$11 A2$8A

-$ 9 0$K9

K 0 8-<$K8

10A AK

72'88 2&'+7

KK$KK <9$9

11$<9 0

AK $<2 A2K$8A

<< 1K

8&'27 28'&.

1 0$8<$ 8

A$1K A$A<

9K0 82 $1-

Liquidity <i5"i# %ssets : 9otal %ssets I&s <20 27'+8 1-$08

%&s

0$08 0$01K

8K$ A < 0$-K

109 A 2

+&'72 28'87

80$91 <-$ 8

0$ 8 0$ 9A

8K9$<2 -2-$-

<K 1K

2+'77 2.'.2

12$-9 20$ A

0$8 <$ 2

2$19 220$K8

1818

28'72

20$K

<i5"i# %ssets : >e,osits

I&s %&s

281 180-

.2'2 .2'82

A8$ <$A2

1$A8 0$02

KK1$<9 898$

10K AK9

.8'+2 +8'++

<$K9 A1$1<

1$A2 0$8

K 9$KA-0$1K

<K 1K-

+8'+7 +2'82

<-$-A AK$1

A$-K A$8

19A$22 A 9$

1K

9able 2' &ank soundness indicators of I&s before and after "007-"008 financial crisis t-test for e5"alit( of means t#value 2$2K 0$KA1$2K0 #2$KK 2$< < 1$918 #1$1<< #1$ 0K #0$-A9 #0$2K1 #0$982 1$101 )#value 0'0&+ 0$292 0$11K 0'007 0'008 0'028 0$1<1 0'028 0$228 0$A01 0$1 0$1<8 0$20K

In#icators

Before the 2007-2008 financial crisis N Mean 2<$21 1-$1A 2 $1< 1A-8$ K9 1$-81 12$01 K$A2 2 $11 K0$<< 88$12 <$ < 2 $<8 4td 2-$28 19$-8 29$8A <AA8$ 99 $ <2 K $9$-1 <$KA 22$ 110$01 K1$11 1-$08

%fter the 2007-2008 financial crisis N <K 22 1< <K <K <K 18 <0 <A <A << <K Mean 1 $K2 1K$ 1-$98 122$2 9 #1$0 2 1$8A2 $88 2$ 1 K2$-9 92$291$22<$-4td 1A$9 8$-K 22$29 10 A $81 $- 02 2A$<$9 122$1 1-$ 1 88$< 1 0$ 9 12$-9

ca)ital ( assets ca)ital ( assets (large banks! ca)ital ( assets (small banks! Total assets (Mill O! 9F:: 9F:3 N75(25 557( N%9 N5(T: N5(; ,ost(%ncome 5i*uid :ssets ( Total :ssets 5i*uid :ssets (

<11 101 210 <1 <0<0K202 <0A 28< 289 <20

281 AK$2 A8$ <K <9$<<-$-A 0$8<1 ;e)osits The t#test of e*uality of means is based on the mean in the )re#crisis )eriod minus that in the )ost#crisis )eriod The test is calculated assuming une*ual variances$

9able +' &ank soundness indicators of %&s before and after "007-"008 financial t-test for e5"alit( of means t#value #0$2#1$-82 #0$K<#A$88< #0$19A 1$A02 A$-91 1$<0#1$ 28 1$K< #0$A92 <$0<$<0 )#value 0$ 08 0'0+8 0$29 0'000 0$K-0'08 0'000 0'087 0'022 0'072 0$<11 0'00& 0'000

In#icators

Before the 2007-2008 financial crisis N Mean 12$10 10$1K 1<$09 2-0-$02A 1$1-2 1<$9 11$<2$1A K2$-A - $9K KA$81 29$-K AK$82 4td 11$9 -$<81<$K< -0<1$9K8 K$ 11 K<$< 1K$-8 98$ 8 19 A$88 A2$8A 20$K <$A2

%fter the 2007-2008 financial crisis N 1K10< KA 1K 1K1K108 1A8 1K1K1K 1K 1KMean 12$< 11$AK 1<$92 8881$9-< 1$21 11$< 8 -$0K 2K$<K KA$--1$K8$1A 2A$AK <2$92 4td 8$A $-A 10$92 1K K8$-A 1$8 1 $22 8$-A KK$-8 1A$K <-$8<$ 8 20$ A AK$1

ca)ital ( assets ca)ital ( assets (large banks! ca)ital ( assets (small banks! Total assets (Mill O! 9F:: 9F:3 N75(25 557( N%9 N5(T: N5(; ,ost ( %ncome 5i*uid :ssets ( Total :ssets 5i*uid :ssets ( ;e)osits

1811A 120< 180180< 1-9< 9-< 1 <8 1-99 1-88 1-KK 1818 180-

The t#test of e*uality of means is based on the mean in the )re#crisis )eriod minus that in the )ost#crisis )eriod$ The test is calculated assuming une*ual variances$

9able .0 t#tests of the e*uality of means of the ca)ital to asset ratio

7eriod ,+ ( 199<#200 ! ( 200-#2008! 2009 181A 2 1KN %+ <11 109 <K ,+ 12$10 1<$0K 12$< Mean %+ 2<$21 18$K2 1 $K2 ,+ 11$90 11$8K 8$A 4td %+ 2-$28 20$91 1A$9 t#test for e*uality of means t#value )#value #-$0 #2$ <2 #1$ 11 0'000 0'00. 0'027

The t#test of e*uality of means is based on the mean for ,+s minus that of %+s at 9KI confidence level The test is calculated assuming une*ual variances$

1-

9able 2' t#tests of the e*uality of means of the )rofitability ratios N ,+ 9F:: ( 199<#200 ! 9F:3 9F:: ( 200-#2008! 9F:3 9F:: 2009 9F:3 180< 1-9< A 2 AK9 1K1K%+ <0<0109 109 <K <K ,+ 1$11<$9 1$A9 1K$<< 1$21 11$< Mean %+ 1$-8 12$01 1$8 12$K1 #1$0 1$8A ,+ K$ 1 K<$< 2$<AK$91$8 1 $22 4td %+ $ < K $9K$K2 1A$<K $2A$t#test for e*uality of means t#value #1$K2 0$KA #0$ 9 1$10 1$92$1)#value 0'07. 0$29A 0$2AK 0$1<A 0'028 0'0&7

7eriod

%ndicators

The t#test of e*uality of means is based on the mean for ,+s minus that of %+s at 9KI confidence level$ The test is calculated assuming une*ual variances$ 9able 7' t#tests of the e*uality of means of the 9F:: for large banks N ,+ ( 199<#200 ! ( 200-#2008! 2009 9F:: 9F:: 9F:: 0K 2A9 10< %+ 101 K< 22 ,+ 1$K 1$AK 1$<8 Mean %+ 1$ K 2$89 #0$A,+ 2$A8 2$1 1$0K 4td %+ A$ < <$18 $ 1 t#test for e*uality of means t#value #0$1-#<$1A9 1$<18 )#value 0$A29 0'00& 0$100-

7eriod

%ndicators

The t#test of e*uality of means is based on the mean for ,+s minus that of %+s at 9KI confidence level The test is calculated assuming une*ual variances$

18

9able 7' t#tests of the e*uality of means of the asset *uality ratios N ,+ N5(T: N5(; ( 199<#200 ! N75(25 557( N%9 N5(T: N5(; ( 200-#2008! N75(25 557( N%9 N5(T: N5(; 2009 N75(25 557( N%9 1-99 1-88 9-< 1 <8 AK8 AKK <0 A<0 1K1K108 1A8 %+ <0A 28< K202 109 10K A 8< <A <A 18 <0 Mean ,+ K2$-A - $9K 11$<2$1A K<$92 -2$9A $<8K <A$KA$--1$-$0K 2K$<K %+ K0$<< 88$12 K$A2 2 $11 A8$98 8A$A$ -K 19$19 K2$-9 92$2$88 2$ 1 ,+ 19 A$88 1K$-8 98$ 8 1-$K9 AK$8 10$09<$28 1A$K <-$8$-A KK$-8 4td %+ 22$ 110$01 $-1 <$KA 20$<1 9-$82 A$2 $8K 1-$ 1 88$< <$9 122$1 t#test for e*uality of means t#value 1$-KA #1$ < )#value 0'0. 0'0.8 0'000 0$118 0'0& 0$11 0'0+ 0'002 0$2-2 0'087 0$AA 0'022

7eriod

%ndicators

$19< 1$18< 2$<A1 #1$201 1$89 2$89K 0$ 11 #1$<20$1<K #1$ <-

The t#test of e*uality of means is based on the mean for ,+s minus that of %+s at 9KI confidence level$ The test is calculated assuming une*ual variances$ 9able 8' t#tests of the e*uality of means of the cost to income ratio N 7eriod ( 199<#200 ! ( 200-#2008! 2009 ,+ 1-KK AK 1K %+ 289 10A << ,+ KA$81 K1$<K8$1A Mean %+ <$ < 2$89 91$2,+ A2$8A <9$9 8<$ 8 4td %+ K1$11 KK$KK 1 0$ 9 t#test for e*uality of means t#value #2$--9 #2 #1$1K )#value 0'002 0'02+ 0$128

The t#test of e*uality of means is based on the mean for ,+s minus that of %+s at 9KI confidence level$ The test is calculated assuming une*ual variances$

19

9able 8' t#tests of the e*uality of means of the li*uidity ratios

7eriod

%ndicators ,+ 5: ( T: 5: ( ; 5: ( T: 5: ( ; 5: ( T: 5: ( ; 1818 180A 2 AK9 1K 1K-

N %+ <20 281 109 10K <K <K

Mean ,+ AK$82 %+ AK$2 ,+ <$A2

4td %+ 1-$08 A8$ 80$91 <$K9 12$-9 <-$-A

t#test for e*uality of means t#value <$1A8 0$191 #0$<K8 #1$KA 0$2A#0$88 )#value 0'000 0$A2A 0$< 0 0'072 0$A02 0$191

( 199<# 200 ! ( 200-# 2008! 2009

29$-K 2 $<8 20$K 28$8- <1$-2 <-$ 8 <8$<< A8$<K A1$1< 2A$AK 2<$-- 20$ A <2$92 <9$<- AK$1

The t#test of e*uality of means is based on the mean for ,+s minus that of %+s at 9KI confidence level$ The test is calculated assuming une*ual variances$

20

9able &0' ;escri)tion of the used variables

21

9able &&' (ummer) statistics for Islamic and conventional banks

anel 1* Conventional Banks

2 C#score Total :ssets (MillO! Net 5oans ( Total :ssets ,ost ( %ncome %ncome ;iversity 2A22 2A2< 2A1A 2< 2<9K 1ean 2<' <8<2'KA K<'102 KA'< 0'A2 /t# <<'K8 9A <'<1 18'A8 A '1K <'2< 1in #11'-K 0'00091 0'01 0'K9 0 1a< 101A'9< 881 K'<1AA'0A 8-<'K8 0'99

anel "* Islamic Banks

C#score Total :ssets (MillO! Net 5oans ( Total :ssets ,ost ( %ncome %ncome ;iversity 2 AAK AK8 AAA2 AK0 1ean 2<'1< 2<A9'-KA K0'19 K'K9 0'K2 /t# <9'<< K-12'19 21'-A -'21 0'29 1in #8'1< 0'20 0'02 A'1K 0 1a< <00'8AKK2-'92 98'92 9K0 1

22

9able &2' +vera,e across the banks in the respective cate,or) 9able &2 0a1' The 199<#200 )eriod +ll &anks ,+ .-score .-score (e/cludin, outliers) %ost0income -oan0assets Income diversit) 2<$K0 22$1K KA$10 K2$80$A%+ 2A$-K 1-$-<PPP <$99PPP A9$2<PPP 0$A0 -ar,e &anks ,+ 22$ 1 21$<2 A $<< KA$<0 0$K%+ 2A$02 1 $-<PPP K $A9PP K<$81 0$<1P (mall &anks ,+ 2<$9K 22$KK8$1A K2$1K 0$A1 %+ 2K$12 18$22PPP -$-8PP A-$01PPP 0$AA

9able &2 0b1' The 200-#2008 )eriod +ll &anks ,+ .-score .-score (e/cludin, outliers) %ost0income -oan0assets Income diversit) 9able &2 0c1) %n 2009 +ll &anks .-score .-score (e/cludin, outliers) %ost0income -oan0assets Income diversit) ,+ 2K$0K 2<$91 K8$1 KA$9< 0$K %+ 12$A8PPP 12$A8PPP 91$2K2$-9 0$12PP -ar,e &anks ,+ 2K$1K 2<$A1 A2$K8 KK$ 2 0$ 1 %+ 12$ 12$ K $ A K0$0$18 PPP PPP (mall &anks ,+ 2A$82A$88-$9 K<$ 2 0$A8 %+ 12$19PPP 12$19PPP 1AA$KA K $ < 0$ <PP 2<$82<$2K0$A< K<$98 0$2K %+ 22$08 1 $12PPP <$19PP A8$ KPPP 0$A2 ,+ 2<$< 22$2< AA$0K<$ A 0$001 -ar,e &anks %+ 20$80 18$<-P K1$< K2$11 0$A ,+ 2A$A2A$AK-$82 KA$<8 0$KK (mall &anks %+ 2<$29 1<$91PPP -K$K8PP AK$2 PPP 0$AAP

Note0 The difference between value of ,+s and %+s at 9KI confidence level is significant at 10I (P!D at KI (PP!' at 1I (PPP!$

2<

9able &+) 9andom # 3ffects (254 regression!

%ll Banks 0&1 log(Total :ssets! (#1! N5(:(#1! ,ost(%ncome(#1! %ncome ;iversity(#1! %slamic dummy ..%(#1! 2overnance ,+ dummy P4hare of %+(#1! %+ dummy P4hare of %+(#1! 3&change 9ate;e)reciation (#1! %nflation(#1! 9eal 2;7 growth (#1! %+ dummy Pcrisis )eriod dummy ,+ dummy Pcrisis )eriod dummy ,onstant Fbservations 9#s*uared (between! #1' A (0$000!PPP #0'00(0'-2A! #0'01A (0'000!PPP #0'18 (0'K0 ! #A'90K (0'12<! #0'001 (0'000!PPP 2'< < (0'<<A! #1A'<A (0'00K!PPP #12'0A (0'02-!PP 0'009 (0'<8A! 0'1-A (0'00 !PPP #0'0-(0'A19! #1'18K (0'12A! 1'<K(0'018!PP <1'<(0'000!PPP 1A-2 0'19< %ll Banks 021 #1' 02 (0'000!PPP 0'01K (0'A80! #0'01< (0'000!PPP #0'2<9 (0'<A9! #A'9 (0'0K1!P %ll Banks 0+1 #1'A2 (0'000!PPP #0'01(0'<8-! #0'01 (0'000!PPP #0'22K (0'A22! #<'281 (0'22<! #0'000A (0'20A! 2'A (0'20 ! A'-21 (0'0< !PP #1'-<1 (0' -! %ll Banks 0.1 #1'99 (0'000!PPP 0'0<A (0'1 8! #0'012 (0'000!PPP #0'<12 (0'<<2! #A'181 (0'121! <ar*e Banks 021 0'00(0'992! 0$018 (0'KK2! #0'0<< (0'000!PPP #0'188 (0'<0-! #<'K0K (0'<0K! #0'001 (0'021!PP 8'21 (0'0K8!P 2'1K9 (0'-<<! # 'K1A (0'AK1! #0'011 (0'109! 0'2A9 (0'002!PPP #0'10 (0'2K<! #1'1<< (0'891! #0'2 (0'-AK! 2 '2(0'092!P 0< 0'2 <ar*e Banks 071 #1'<2A (0'00A!PPP 0'019 (0'A<0! #0'0<1 (0'000!PPP #0'10(0' 1A! #A' 9A (0'09<!P <ar*e Banks 071 #1'K<9 (0'02!PP #0'009 (0'-A ! #0'0<2 (0'000!PPP #0'1K8 (0'K08! #<'-91 (0'202! #0'0001 (0' A8! 1'1K< (0' 9<! -'A<8 (0'00<!PPP 2'<K1 (0' A-! <ar*e Banks 081 #0'A(0'K1-! 0'0-2 (0'01A!PP #0'0<1 (0'000!PPP #0'0 0 (0'-2A! #A'8<(0'100!P mall Banks 081 #2'-A< (0'000!PPP #0'01K (0' 2 ! #0'01< (0'001!PPP #1'< < (0'10A! #<'8K< (0'A0K! #0'002 (0'001!PPP 0'8< (0'--A! #A '2 (0'000! #9'9K (0'1K8! 0'02< (0'08A!P 0'19K (0'0<!PP #0'0A(0'80K! #<'089 (0'008!PPP 2'900 (0'001!PPP AA'9< (0'000!PPP 8 9 0'222 mall Banks 0&01 #1'9A (0'000!PPP 0'000(0'9--! #0'011 (0'000!PPP #0'91A (0'09!P #2'A01 (0'A-<! mall Banks 0&&1 #2'2(0'000!PPP #0'002 (0'918! #0'012 (0'000!PPP #0'9A< (0'2 <! #<'KAK (0'<-A! #0'001 (0'00 !PPP 0'<1 (0'898! #28' 8 (0'000!PPP #<' 1< (0'K20! mall Banks 0&21 #2'K22 (0'000!PPP 0'00A (0'88-! #0'01A (0'000!PPP #0'99(0'082!P #1'A-0 (0' 9A!

0'009 (0'2 8! 0'028 (0'A <! 0'1<0 (0'018!PP #1'199 (0'109! 1'1 2 (0'0<0!PP 2K'<1 (0'001!PPP 22<< 0'12

#0'01A (0'022!PP 0'20A (0'00-!PPP 0'0A(0'A2<! #0'KA9 (0'K<8! #0'92A (0'19K! 11'-K (0'A<-! 80 0'2

0'01< (0'1 <! 0'0<9 (0'A0 ! 0'19(0'02-!PP #2'-9 (0'022!PP 2'8K< (0'001!PPP 28'KA (0'000!PPP 1A20'11-

#0'0-1 (0'899! 0'A-(0'2 9! 2K'0< (0'001!PPP 2 A1 0'128

#0'-0(0'28K! 0'-01 (0'12K! 2A'8< (0'000!PPP 2 A1 0'128

0'901 (0'1K8! #0'99A (0'0<2!PP 2K'98 (0'01A!PP 100'182

0'A<8 (0'K92! #0'<02 (0' 02! 2-'AA (0'0 2!P -K1 0'2<0

#1'A-2 (012-! 2'<9K (0'001!PPP 2-'2K (0'000! 1K K 0'11K

#2'<02 (0'029!PP 2'8<A (0'000!PPP <-'K9 (0'000! 9<0 0'218

2A

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