Assessing Islamic Banking System Vulnerabilities in Pakistan: Evidence from ‘Bankometer’ Model

Abstract

Recent global financial crises affected not only conventional banking, but also Islamic banks to some extent due to the absence of early warning systems. To avoid such vulnerabilities, there must be efficient measures that could identify in advance the emergence of susceptibility of financial crises. This study proposes the ‘Bankometer’ model as an early warning tool to help Islamic banks overcome such challenges by providing them with useful Shari’ah-compliant guidelines and to desist from vulnerabilities of future financial crises. Using published unbalanced quarterly data of all Islamic banks operating in Pakistan, we use regression models to examine the impact of global financial crisis on the banking system. The results suggest that regulatory capital, funding cost, size, return on assets and return on equity are associated with crisis period. The evidences also suggest that ‘Bankometer’ as an early warning tools could be useful for assessing Islamic banking system vulnerabilities in Pakistan.