Financial Stability Analysis of Islamic Banks in Bangladesh

Abstract

The paper intends to examine the key factors of financial stability of listed Shariah-based Islamic Banks of Bangladesh for a period of 2009 to 2019. Z-score is used here as a proxy for financial stability measurement, with independent variables including bank-specific, bank industry-specific, and macroeconomic factors. Bank specific determinants are nonperforming investment, bank size, capital adequacy, return on equity, earnings, liquidity and management efficiency. Development in the banking sector is a factor that is unique to the banking industry, while GDP and inflation are macroeconomic factors. To learn more about the factors that affect the financial health of Bangladesh's listed Shariah-based Islamic banks, pooled ordinary linear regression (OLS) analysis was used. The results demonstrate that capital adequacy, earning and banking sector development have a positive and statistically significant impact on financial stability of Islamic banks. On the other hand, nonperforming investment has a negative and statistically significant effect on the financial stability of Islamic banks. correlation matrix shows that non-performing investment and management efficiency is negatively correlated with financial stability. In contrast, return on equity and liquidity are positively correlated with financial health. The findings would add value in the decision makers of the bank supervisors to formulate strategies to maintain the financial stability. It would be one of the few papers on financial stability of Islamic banks in Bangladesh which has investigated macroeconomics as well as bank specific determinants altogether on the financial stability.