The Impact of Islamic and Conventional Banking Competition on Financial Stability

Abstract

The impact of banking competition on financial stability/fragility is an essential issue in the banking literature. There is much research on the association between financial stability/fragility and banking competition in developed countries. However, no prior research examines the comparison of conventional and Islamic banks. The study uses data from nine countries Pakistan, Indonesia, Malaysia, Bangladesh, Egypt, Kuwait, Oman, Iraq and Jorden for the period 2010-2020. This study uses a fixed effects model to examine the influence of competition and income diversity on bank financial stability. We study how these variables affect Islamic and conventional banks differently using an empirical framework. Our findings show a considerable positive association between competition and conventional banks' financial stability; however, this relationship was found to be insignificant for Islamic banks. Furthermore, according to our research, the diversification of income has a positive impact on the financial well-being of both Islamic and conventional banks. Our study highlights the significance of fostering trustworthy competition within the banking sector to enhance overall financial stability. Furthermore, our findings indicate that promoting healthy competition in the industry can contribute to the improvement of financial stability.