Is Islamic Banking More Procyclical? Cross-Country Evidence

Abstract

This paper investigates the cyclicality of Islamic banking relative to conventional banking. It examines whether loan growth and profitability have a different sensitivity to economic growth for Islamic banks and for conventional banks. We used panel data from 525 banks covering 16 countries with dual banking systems spanning the period from 2008 to 2018. We found no difference in lending cyclicality: Islamic banks and conventional banks both have procyclical lending behavior. Profitability, on the other hand, is procyclical for Islamic banks but not for conventional banks. Our findings support the view that Islamic banking presence does not contribute to strengthened economic stability.