Financial Stability in Islamic Banking System; the Capacity to React to Current World Wide Crisis

This paper investigates the financial stability, measured by z-score technique in Islamic banking system of 20 countries from 2000 to 2010. We compare the stability of Islamic banks to the commercial banks, before and after the financial crisis. The empirical results from panel estimation show that: a) the large Islamic banks are more stable than the large commercial banks and furthermore, the small Islamic banks have lower z-score comparing to the small commercial banks. b) as past history shows, in general the financial crisis has a direct negative impact on stability of the large banks; moreover, our study shows that after a financial crisis the small Islamic banks are more stable than large Islamic banks. c) there is no significant difference between stability in oil and non-oil producing countries, however results change between the small and large banks in the two groups of Islamic and commercial banks which tend to be more stable for oil producing countries.