Economic Modelling 64 (2017) 626–637

Contents lists available at ScienceDirect

Economic Modelling
journal homepage: www.elsevier.com/locate/econmod

Islamic banking and risk: The impact of Basel II MARK

a b,⁎
Alexandra Zins , Laurent Weill
a
LaRGE, University of Strasbourg, France
b
LaRGE, EM Strasbourg Business School, University of Strasbourg, France

A R T I C L E I N F O A BS T RAC T

JEL Codes: The expansion of Islamic banking raises questions about its impact on financial stability. We question whether
G21 the implementation of Basel II standards influences the gap in risk between Islamic and conventional banks. We
Keywords: use a sample of 558 banks from 24 countries that had an Islamic banking presence between 2007 and 2013. We
Islamic banking exploit the variation in Basel II implementation across countries to use a differences-in-differences approach.
Risk Risk is considered according to insolvency risk and credit risk indicators. We find that Basel II standards enlarge
Financial stability the gap in risk between Islamic and conventional banks at the expense of Islamic banks. These findings are also
observed when separately considering small banks and large banks. We thus support the view that the
relationship between Islamic banking and risk is conditional to the regulatory framework.

1. Introduction
Islamic finance is expanding worldwide. According to TheCityUK
(2015), global assets of Islamic finance have tripled between 2007 and
2014 to reach $2 trillion. Islamic banking represents the main form of
Islamic finance, accounting for nearly $1.6 trillion at the end of 2014,
with Islamic banks particularly active in the Middle East and in Asia.
The implications of the development of Islamic banking then have
to be questioned. A large amount of research has been devoted to
analyze how this expansion generates microeconomic effects on bank
efficiency (Abdul-Majid et al. 2010; Srairi, 2010) and bank competition
(Turk-Ariss, 2010; Weill, 2011) and macroeconomic effects on financial
development (Gheeraert, 2014) and economic growth (Gheeraert and
Weill, 2015; Imam and Kpodar, 2016).
A major issue is how Islamic banking growth exerts an impact on
financial stability: are Islamic banks associated with greater or lower
risk than conventional banks? A few studies have investigated this
question by comparing the risk measures between the two types of
banks (Čihák and Hesse, 2010; Abedifar et al. 2013; Beck et al., 2013).
Their main conclusion is that small Islamic banks have a lower risk
profile than small conventional banks, while no clear difference is
observed for large banks. However, the gap in risk-taking between the
two types of banks may be influenced by the regulatory framework of
the country. Klomp and De Haan (2012) have indeed shown that the
effect of regulation on bank risk is not uniform among banks, with a
greater effect of regulation on high-risk banks.
The question we address in this paper is whether Basel II standards
influence the risk features of Islamic banks. The implementation of
such rules can have different types of impact on Islamic and conven-
tional banks. Basel regulations have been designed for conventional
banks. However, Islamic banks are also subjected to this regulatory
framework when it becomes implemented in one country. With the
growing development of international financial standards — from
capital adequacy to accounting rules — Islamic financial institutions
must comply with the same rules as conventional banks do.
Basel regulations have been established by the Basel Committee on
Banking Supervision to foster financial stability. Even if this committee
has no power of coercion, the principles it publishes are adopted by
many countries worldwide and are considered the benchmark for
banking regulation. The Basel I standards were established in 1988
to introduce minimum capital requirements for banks. The Basel II
regulatory framework was adopted in 2004 to reform Basel I and began
being implemented in 2006. It is organized around three pillars. Pillar
1 refers to minimum capital requirements. Banks must have a
minimum amount of capital to cover credit risk, trading book risk
and operational risk. Several methods of calculation are proposed to
weight risk. In the Basel II framework, capital requirements are risk-
based; the risks are weighted for each asset to obtain capital that
matches the real risk profile of the bank. Pillar 2 is devoted to
prudential supervision and is aimed at reinforcing regulatory autho-
rities’ power. Pillar 3 relates to market discipline. The disclosure of
relevant information about banks’ financial profiles is compulsory to
ensure transparency so that market discipline can operate most
effectively.
Several studies have analyzed the impact of Basel II regulation for
conventional banks. From a theoretical perspective, Hakenes and

⁎
Correspondence to: Institut d’Etudes Politiques, Université de Strasbourg, 47 avenue de la Forêt Noire, 67082 Strasbourg Cedex, France.
E-mail address: laurent.weill@unistra.fr (L. Weill).

http://dx.doi.org/10.1016/j.econmod.2017.05.001
Received 31 August 2016; Received in revised form 29 April 2017; Accepted 3 May 2017
Available online 08 May 2017
0264-9993/ © 2017 Elsevier B.V. All rights reserved.
A. Zins, L. Weill
Schnabel (2011) show that the implementation of Basel II gives
incentives for small banks to take higher risks because of competitive
advantage for larger banks, while Rime (2005) concludes that Basel II
regulation can induce sophisticated banks to specialize on low-risk
borrowers and unsophisticated banks to specialize on risky borrowers.
Regarding the impact of capital requirements in general on bank risk-
taking, literature is divided between the papers supporting the view
that capital requirements give incentives to banks to have more
cautious asset portfolios (e.g., Furlong and Keeley, 1989) and those
supporting the opposing view (e.g., VanHoose, 2007). From an
empirical perspective, Behn et al. (2015) find that the implementation
of Basel II regulation has reduced lending in Germany. In a broader
perspective, a large set of papers has shown that increases in capital
requirements contribute to reducing bank lending (e.g., Ivashina and
Scharfstein, 2010; Aiyar et al. 2014).
We can then question whether the implementation of Basel II
regulation has a differentiated impact on the risk of Islamic and
conventional banks. To examine this question, we exploit variation in
Basel II implementation across 24 countries where Islamic banks are
active. During the period of study, 10 countries in our sample had
implemented Basel II standards in different years. Thus, the gradual
application of Basel II standards at different times provides a “quasi-
natural experiment” allowing us to use a differences-in-differences
approach. With this research design, we compare the effect of Basel II
on the risk of Islamic and conventional banks between countries in
which it is applied and the others for each year. We consider four
indicators of risk to take into account insolvency risk and credit risk, in
line with the previous literature on Islamic banking and risk.
Our paper therefore contributes to the debate on the implications of
Islamic banking development. We provide information of prime
interest to explain how the expansion of Islamic banking influences
financial stability. Specifically, we extend previous work on Islamic
banking and risk by taking into account the fact that this relationship
can be dependent on bank regulations that are in place. It also
contributes to the literature on the impact of Basel II standards by
examining how the risk effects of this regulation are influenced by the
structure of the banking industry between conventional banks and
Islamic banks.
This work therefore has major normative implications. It provides
information on the influence of Basel II regulation on the risk of
Islamic banks. If conventional banking regulation is not compatible
with Islamic banking, Basel II can have an unexpected influence on the
risk of the banking industry in a country with a large Islamic banking
sector. Furthermore, this research can show that the expansion of
Islamic banks can have different types of impact on financial stability,
depending on the presence of Basel II regulation. Finally, several
authors have discussed the fact that a specific prudential framework
would be required to fit the peculiar features of Islamic banking (Errico
and Farahbaksh, 1998; Chapra and Khan, 2000; El-Hawary et al. 2007;
Bitar and Madiès, 2013). This work therefore constitutes an empirical
response to this debate.
The rest of the article is structured as follows. Section 2 develops
the background for the research question. Section 3 presents the data
and methodology. Section 4 displays the results. Section 5 concludes.
2. Background
In this section, we present the background for our research
question. We first provide theoretical and empirical elements on the
relationship between Islamic banking and risk. We then present the
hypotheses on how Basel II standards can influence this relationship.
2.1. Islamic banking and risk
Based on the differences between Islamic and conventional banks,
the question of whether Islamic banking is associated with higher or
627
Economic Modelling 64 (2017) 626–637
lower risk than conventional banking is debated.
On the one hand, several arguments support the hypothesis that
Islamic banks are likely to be associated with higher risk. First, PLS
(Profit and Loss Sharing) accounts can increase uncertainty on
depositors’ returns and, as such, can increase the likelihood of bank
runs, as stressed by Beck et al. (2013). Indeed, according to Khan and
Ahmed (2001), the withdrawal risk is higher in Islamic banks than in
conventional banks. Second, Islamic banks do not have the same access
to risk-hedging instruments and to the interbank market in many
countries,1 as they cannot be involved in activities that include interest.
In addition, Islamic banks suffer from the absence of a developed
secondary market for sukuk, the Shari’a-compliant equivalent to
conventional bonds, and a shortage in Shari’a-compliant short-term
funds. It therefore strengthens their requirements to have large
liquidity buffers. Consequently, they have more liquidity problems.
Third, the operational risk is expected to be higher for Islamic banks.
On the one hand, Shari’a compliance of Islamic bank activities leads to
an operational risk for these banks related to the reputation risk of the
bank. Misconduct or negligence regarding Shari’a compliance can lead
to the invalidity of contracts (El Tiby, 2014). On the other hand,
operational risk is higher for Islamic banking transactions (Errico and
Farahbaksh, 1998; Song and Oosthuizen, 2014). The management of
PLS instruments associated with their complexity leads to higher
operational risk.
On the other hand, there are many arguments in favor of the
hypothesis that Islamic banks have lower risk than conventional banks.
First, PLS accounts allow Islamic banks to pass fluctuations in their
income to depositors in the form of fluctuating returns for this category
of creditors. Lower income means lower payment to creditors, and this
relationship does not exist for a conventional bank. Consequently, this
reduces the insolvency risk for the bank. Second, PLS accounts offer
greater incentives for depositors to discipline banks because they are
more concerned with the return of projects financed by banks (Khan
and Ahmed, 2001), which then diminishes the moral hazard problems
resulting from a lack of discipline by depositors. Third, clients of
Islamic banks can have greater incentives to repay their loans for
religious reasons. Baele et al. (2014) provide evidence supporting this
argument in their comparison of the default rates between Islamic
loans and conventional loans on all business loans granted in Pakistan
from 2006 to 2008. They find that default rates are substantially lower
for Islamic loans than for conventional loans. They interpret this
finding based on the conflict experienced by borrowers regarding their
religious beliefs when defaulting on an Islamic loan.
From an empirical perspective, three works provide evidence for
the relationship between Islamic banking and risk. Čihák and Hesse
(2010) compare financial stability between Islamic and conventional
banks for a cross-country sample of 474 banks from 19 countries over
the period 1993–2004. They measure financial stability with the z-
score, which is an individual measure of bank risk that focuses on
insolvency. In univariate and multivariate analyses, they find that large
Islamic banks are less stable than large conventional banks, while small
Islamic banks are more stable than small conventional banks. Hence,
the difference in bank risk between Islamic and conventional banks
would favor one type depending on bank size. They also observe that
small Islamic banks are more stable than large Islamic banks. Thus, as
long as Islamic banks remain small, they would have an advantage in
financial stability. The authors state that it may be more complex for
Islamic banks to monitor their loans when they become larger because
of the lower standardization of PLS arrangements.
Abedifar et al. (2013) provide a broader comparison of risk between
Islamic and conventional banks for a cross-country sample of 553
1
Islamic interbank markets are still relatively underdeveloped, with large differences
across countries. For instance, the Malaysian Islamic interbank market is developing,
and Iran – having a fully-fledged Islamic financial system – is taking steps to provide
access to liquid funds.
A. Zins, L. Weill
banks in 24 countries between 1999 and 2009. They consider
insolvency risk with the z-score and credit risk with the ratios of loan
loss reserves to gross loans, loan loss provisions to gross loans, and
impaired loans to gross loans. In addition, they also measure the ability
of Islamic banks to extract higher rents than conventional banks by
considering proxies for interest rates: net interest margin and implicit
interest rates. They observe that Islamic banks have a lower credit risk
than conventional banks. They find that small Islamic banks have lower
insolvency risk than small conventional banks, in line with Čihák and
Hesse (2010), while no significant difference is observed for large
banks. Finally, they do not find a significant difference in charged
interest rates, suggesting that Islamic banks do not provide Shari’a-
compliant financial products at higher costs to their clients.
Beck et al. (2013) compare Islamic and conventional banks with a
large array of indicators, including asset quality and financial stability.
They consider a sample of 2956 banks in 141 countries for the period
1995–2007. In comparison with the two previous studies, this work is
therefore not restricted to countries in which Islamic banking is active.
They investigate three indicators of asset quality (loan loss reserves,
loan loss provisions, non-performing loans, all scaled by gross loans)
and three indicators of financial stability (z-score and two of its
components: return on assets and equity to assets). They do not find
significant differences between Islamic and conventional banks for all
indicators of asset quality and financial stability, with the notable
exception of equity to assets, for which Islamic banks have greater
levels.
In summary, the analysis of the differences between Islamic and
conventional banks provides arguments in favor of higher or lower risk
for Islamic banks, while empirical evidence finds evidence in favor of
differences in the risk between Islamic and conventional banks. Small
Islamic banks tend to have lower risk, while the evidence is less clear
for large banks.
2.2. Hypotheses
We now consider the hypotheses on how the implementation of the
Basel II regulation can influence the relationship between Islamic
banking and risk. The aim is to identify whether Basel II standards
widen the gap in risk between Islamic banks and conventional banks.
The first hypothesis is that Basel II standards contribute to
enlarging the gap in risk between conventional banks and Islamic
banks at the expense of the latter; Basel II would then contribute to
increasing Islamic banks’ risk relative to conventional banks. Four
arguments can be provided to explain why Basel II standards can
contribute to make Islamic banks relatively riskier than conventional
banks.
First, Basel II standards can reduce additional risk-taking for
conventional banks than for Islamic banks because of the different
profiles of the depositors. Namely, depositors of Islamic banks have a
greater incentive to monitor bank performance than depositors of
conventional banks due to the nature of profit-and-loss sharing
contracts. Consequently, depositor discipline is higher for Islamic
banks than for conventional banks. Thus, even in the absence of tight
capital requirements, risk should be lower for Islamic banks because
these financial institutions are more concerned with handling risk
properly.
Second, Basel II standards can reduce risk-taking for conventional
banks more than for Islamic banks because of the different levels of
equity held by each type of bank. Islamic banks indeed have incentives
to maintain a higher level of equity than conventional banks because of
their potential liquidity problems. These banks do not have the same
access to an interbank market in the vast majority of countries and
cannot rely on derivatives and hedging tools. Consequently, it is
advisable that they keep lower short-term debt and rely more on
equity. They have also to hold more equity to constitute reserves with a
share of their profits so that they can face liquidity stress.
628
Economic Modelling 64 (2017) 626–637
Third, the Basel II standards on market discipline can contribute to
enhancing information disclosure more for conventional banks than for
Islamic banks and, as such, can foster market discipline, particularly
for conventional banks, due to the ban on uncertainty in Islamic
finance. This restriction means that transparency is required in
transactions and, as such, one party cannot purposely withhold
information to have greater control over the transaction.
Fourth, the Basel II capital requirements can increase risk for
Islamic banks relative to conventional banks because of the risk-
weighted methodologies. Risk-weighted capital requirements are com-
puted to reduce risk-taking for banks, but the Basel II methodologies
for their calculation are based on conventional banking. As stressed by
Smolo and Hassan (2010), the Basel II framework for the determina-
tion of risk-weighted assets does not consider the risks relevant to the
specific features of Islamic banking activities. The use of internal rating
models proposed by the Basel II regulation could solve the problem,
but it is rarely applied because of its costs and difficulties of application
(Chapra and Khan, 2000).
The second hypothesis nonetheless posits that Basel II standards
affect the gap in risk between conventional banks and Islamic banks
but at the expense of conventional banks. In other words, this
regulation would be more beneficial for Islamic banking based on the
hypothesis that depositors of Islamic banks would discipline their
financial institutions less than depositors of conventional banks for
religious motives (Abedifar et al. 2013). Namely, the loyalty of religious
depositors would allow Islamic banks to take greater risks because they
are less inclined to withdraw their money.
The third hypothesis assumes that Basel II standards do not
influence the gap in risk between conventional banks and Islamic
banks. The underlying idea is that this regulation affects Islamic and
conventional banks in a similar way. The argument is that the current
practice of Islamic banks is not different enough from conventional
banks to expect a different impact from the Basel II standards. One key
mechanism through which Basel II regulation can influence banks is by
affecting their asset mix. This mechanism could then exert a different
impact on Islamic and conventional banks if the two types of banks
have different asset mixes — notably, if Islamic banks hold a large share
of profit-and-loss sharing contracts. Even so, the practice shows that
Islamic banks hold a limited share of these contracts in their balance
sheets (El-Hawary et al. 2007; Chong and Liu, 2009).
In a nutshell, the practice of Islamic banks provides opposing
arguments with respect to the impact of Basel II standards on their risk
relative to conventional banks. It is consequently of interest to provide
an empirical investigation to contribute to this debate.
3. Data and methodology
The following discussion presents the data and then describes the
methodology used to examine the impact of Basel II standards on bank
risk for Islamic and conventional banks.
3.1. Data
We use data from Bankscope for all variables related to bank-
specific characteristics. We consider the period 2007–2013. Our
sample covers 24 countries in which Islamic banks are active, which
includes 411 conventional banks and 147 Islamic banks. The classifica-
tion of banks between Islamic banks and conventional banks is based
on Bankscope. In line with Cihak and Hesse (2010), we are not able to
consider Islamic windows when they are Islamic branches of conven-
tional banks in our comparison. The outcome of this classification is
displayed in the Appendix A. We provide the composition of the sample
of banks by type and country in Table 1.
The focus of our research is to investigate the role of Basel II
standards on the relationship between Islamic banking and risk. The
explained variable is bank risk. In line with the previous literature, we
A. Zins, L. Weill Economic Modelling 64 (2017) 626–637

Table 1 bank loans. Consequently, the higher each ratio is, the riskier the bank
Overview of the sample. This table provides information on the countries used in the loans are.
sample with the number of each type of banks and the year of implementation of Basel II
The set of explanatory variables includes the dummy variable
regulation.
Islamic that is equal to one if the bank is Islamic and zero if it is
All banks Islamic Conventional Year of not. It also includes the dummy variable Basel II, which is equal to one
banks banks implementation of if the country has implemented Basel II standards for the year under
Basel II consideration and 0 otherwise. Information on the presence of Basel II
Bahrain 30 18 12 2008 standards is collected from the “Bank Regulation and Supervision”
Bangladesh 41 6 35 2010 survey conducted by the World Bank, the Financial Stability Institute
Brunei 2 1 1 – (FSI) survey from the BIS and central bank websites for the countries
Egypt 25 2 23 2009 of the sample.
Gambia 9 1 8 –
The explanatory variable of primary concern is the interaction term
Indonesia 79 10 69 2007
Iraq 19 7 12 – between Islamic and Basel II. This variable gives information on the
Iran 16 16 0 – differentiated impact of the implementation of Basel II standards on
Jordan 14 3 11 2008 Islamic and conventional banks. Namely, if the coefficient of
Kuwait 17 9 8 2005
Islamic×Basel II is positive (negative) for the z-score (credit risk
Lebanon 50 3 47 2006
Malaysia 50 17 33 2008 variables), this means that Basel II standards contribute to a greater
Mauritania 11 2 9 – reduction of bank risk for Islamic banks than for conventional banks.
Oman 7 1 6 2006 In other words, this regulation would be more beneficial for Islamic
Pakistan 31 9 22 2008 banks. In contrast, the opposite sign for the coefficient of
Palest. 4 2 2 2012
Islamic×Basel II would support the view that Basel II standards
Territories
Qatar 11 4 7 2006 enlarge the gap in risk between conventional and Islamic banks at
Saudi Arabia 13 4 9 2006 the expense of the latter.
Sudan 25 12 13 – We include control variables to take into account bank and country
Syria 15 2 13 2011
characteristics. We consider three bank-level control variables. Size is
Tunisia 18 1 17 –
Turkey 34 4 30 2012
measured by the logarithm of total assets because the scale of
UAE 28 9 19 2009 operations can exert an impact on bank risk. Loans to Assets measures
Yemen 9 4 5 – the structure of activities, in line with the view that loan growth
All 558 147 411 influences risk (Foos et al. 2010). Cost to Income is measured by the
cost-to-income ratio. According to Berger and DeYoung (1997), cost
inefficiency would increase risk.
consider four different measures to assess bank risk.
We consider four country-level control variables. GDP Growth
We first measure insolvency risk with the z-score (Z-score), which is
allows us to control for the macroeconomic cycle, which is drawn from
commonly used in empirical studies as a proxy for bank stability
World Development Indicators. HHI is the Herfindahl-Hirschmann
(Laeven and Levine, 2009; Berger et al. 2009). The z-score is the key
Index measuring bank concentration and is computed with data from
risk measure used by Čihák and Hesse (2010) in their study on Islamic
Bankscope. A number of studies have stressed that bank competition
banking and financial stability and is considered with other risk
can enhance bank risk (Berger et al. 2009; Fungacova and Weill, 2013).
indicators discussed by Abedifar et al. (2013) and Beck et al. (2013)
Rule of Law denotes the quality of the institutions and reflects
in their works linking Islamic banking and risk. The z-score is
perceptions of the extent to which people have confidence in the rules
computed as follows:
of their country. Institutional quality can influence the risk-taking
Z−scorei, t = [ROA i + CAR i]t /[SD(ROA i)] (1) behavior of banks (Bae and Goyal, 2009) and comes from Worldwide
Governance Indicators from the World Bank. Inflation is the annual
where ROA is the return on assets measured by the ratio of net income percentage change of the consumer price index and is obtained from
to total assets, CAR is the ratio of equity capital to assets, SD(ROA) is World Development Indicators.
the standard deviation of ROA, i refers to a given bank and t refers to The descriptive statistics of the bank-specific variables are pre-
the year. SD(ROA) is the standard deviation of ROA for the period we sented in Table 2. We conducted tests of significance of the means
are studying — 2007 to 2013 — and refers to return volatility. The z- between the two types of banks. In this aim, we resort to a Wilcoxon
score is inversely related to the probability of bankruptcy of the bank; test because the variables are not normally distributed. The comparison
thus, a higher z-score is associated with greater stability. Using the z- of means for Islamic and conventional banks tends to show greater risk
score allows us to compare different types of banks because it implies for Islamic banks. They have a lower average z-score, in line with
an equal and objective evaluation of bank soundness. higher insolvency risk, and present higher average loan loss reserves
We then use three measures related to credit risk. Following and loan loss provisions ratios, revealing higher credit risk. The only
Abedifar et al. (2013), the ratio of loan loss reserves to gross loans credit risk indicator suggesting a different perspective is the impaired
(Loan loss reserves) is our main indicator for credit risk, which reveals loans ratio, which is lower for Islamic banks.
the judgment of bank managers of the loan portfolio. The ratio of loan
loss reserves to gross loans takes into account the expectations for 3.2. Methodology
future performance of granted loans. Higher levels of reserves suggest
greater banking risk, accounting for future anticipated low periods. In Our empirical strategy is based on the use of the difference-in-
addition, we utilize two alternative credit risk indicators that, as noted differences approach to analyze the impact of Basel II standards on the
by Abedifar et al. (2013), are both backward-looking proxies for credit relationship between Islamic banking and risk. We apply this approach
risk: the ratio of loan loss provisions to gross loans (Loan loss because we can exploit variation in Basel II implementation among the
provisions) and the ratio of impaired loans to gross loans (Impaired 24 countries of our sample during the period of study from 2007 to
loans). Loan loss provisions refer to the costs that banks must pay 2013. Namely, 6 countries had the Basel II regulation implemented in
when re-assessing the loan loss reserves or writing off a loan. The 2007, 10 countries performed this implementation in different years
impaired loans ratio expands when the bank classifies a loan as non- during the period, and 8 countries did not have Basel II implementa-
performing. All three indicators for credit risk consider the quality of tion at the end of the period. Thus, the gradual application of Basel II

629
A. Zins, L. Weill Economic Modelling 64 (2017) 626–637

Table 2 ables. This coefficient informs us about the effect of Basel II imple-
Descriptive statistics. This table provides the descriptive statistics for variables at the mentation on the difference in risk between Islamic and conventional
bank level included in the estimations. The Wilcoxon test measures the significance of the
banks.
sample means for non-parametric variables. It has been realized after testing the
normality of the distributions thanks to a Shapiro-Wilk test. ***, **, and * indicate
significance at 1%, 5%, and 10%, respectively. 4. Results

Islamic banks Conventional banks This section presents our results for the impact of the implementa-
N Mean SD N Mean SD Wilcoxon test
tion of Basel II standards on risk for Islamic banks. We start with the
main estimations and afterwards provide additional estimations.
Z-score 682 34.631 41.684 1933 39.366 32.986 7.535*** Finally, we perform robustness tests.
Loan loss 529 7.771 15.265 1788 6.961 10.984 2.005**
reserves
4.1. Main estimations
Loan loss 491 1.631 3.053 1807 1.223 2.283 −3.061***
provisions
Impaired 353 7.695 12.107 1382 8.472 13.296 1.568 Our main results are displayed in Table 3. We present the
loans estimations by alternatively considering each of the four risk measures
Size 706 14.253 1.873 1989 14.602 1.868 3.909***
as the dependent variable. For each risk measure, the relationship is
Loans to 666 46.515 24.872 1960 49.142 19.767 1.450
assets estimated twice: first without interaction between Islamic and Basel II
Cost to 650 60.063 34.832 1947 54.636 27.023 −3.110*** in odd-numbered columns and then incorporating an interaction term
income in the even-numbered columns. We reiterate that higher levels of the
insolvency risk measure (Z-score) are associated with lower bank risk,
while lower levels of the three credit risk indicators denote lower bank
standards at different times provides us with a “quasi-natural experi- risk.
ment”. We first examine the results of the estimations without the
We can then use the difference-in-differences approach, which interaction term in the odd-numbered columns. Islamic is not sig-
allows control for the changing economic conditions or any other nificant in all estimations aside from a positive and significant
factors that apply to all banks, i.e., both the control group and coefficient regarding Loan loss provisions. We then tend to see no
treatment group. Our treatment group is composed of banks in risk differences between Islamic and conventional banks in general.
countries with an implementation of Basel II for the specific year. These results are in accordance with Beck et al. (2013), who also do not
Our control group includes banks in countries with no implementation find significant differences between Islamic and conventional banks
of Basel II for the specific year. with the same risk measures. The results tend to differ from those
With this research design, we can identify precisely how Basel II provided by Abedifar et al. (2013), who find lower credit risk for
influences risk in Islamic banking vs. conventional banking. The Islamic banks.
observed association between Basel II implementation and bank risk Basel II is positive and significant when explaining Loan loss
can be driven by other events occurring at the time of this application reserves and Impaired loans and is not significant when explaining
and can then lead to biased conclusions. The differences-in-differences Z-score and Loan loss provisions. These results provide some support
approach enables us to address this problem because we compare the for the fact that Basel II standards would enhance credit risk in general
difference between the treatment group and the control group in their for banks while have no influence, positive or negative, on the
changes before and after Basel II implementation. insolvency risk for our sample of emerging countries.
A major issue for the application of the differences-in-differences However, the most striking result, which is central to the question
approach is the similarity between the comparison groups. We comply of the paper, materializes in even-numbered estimations, i.e., when the
with this requirement using our sample of countries that consist of interaction term Islamic×Basel II is added to the set of explanatory
emerging countries from the Middle East and Asia. All countries are variables.
similar along several critical dimensions, such as institutional quality With the z-score, Basel II is positive and significant, while the
or being an emerging country. interaction term Islamic×Basel II is negative and significant. We
We perform random effects regressions to examine the impact of therefore observe a negative impact of Basel II standards for Islamic
Basel II implementation on the risk profile of the banks. This banks, in opposition to the positive impact of Basel II standards for
specification is motivated by the use of panel data and the fact that conventional banks. Therefore, we find that Basel II standards enlarge
the explanatory variable Islamic is constant over time.2 The tested the gap in insolvency risk between Islamic and conventional banks by
equation is as follows: exerting opposite influences on insolvency risk for the two types of
banks.
Bank Riski, j, t = β0 + β1 Islamici, t + β2Basel IIj, t + β3 Islamic
With Loan loss reserves, the main indicator for credit risk, Basel II
× Basel IIi, j, t + β4 Sizei, t + β5 Loans to assetsi, t and the interaction term Islamic×Basel II, are significantly positive.
Therefore, the impact of Basel II standards increases the credit risk for
+ β6 Cost to incomei, t + β7 GDP growthj, t + β8 HHIj, t
both types of banks but in a stronger way for Islamic banks. These
+ β9 Inflationj, t + β10 Rule of Lawj, t + εi, j, t (2) results also consequently support the view that Basel II standards
widen the difference in risk between the two types of banks.
With all variables defined above, i refers to the bank, j to the With Loan loss provisions, neither Basel II nor the interaction term
country and t to the year. ɛi,j,t is the residual. We consider four different Islamic×Basel II are significant. In other words, we find no evidence of
variables for the dependent variable in line with our explanations on an impact of Basel II standards on any type of banks with this indicator
how we measure bank risk. for credit risk. With Impaired Loans, Basel II is significantly positive,
Our attention is focused on the coefficient β3, which concerns the but the interaction term Islamic×Basel II is not significant. These
interaction term between Islamic banking and Basel II dummy vari- findings then suggest that Basel II standards have the same positive
impact on bank risk for all banks.
2
We have also estimated the random effects model with the Mundlak approach which
Therefore, our main conclusion is that the Basel II standards
extends the model with the individual means of the independent variables (Mundlak, contribute to making Islamic banks riskier relative to conventional
1978). We obtain the same findings. banks. They reduce the insolvency risk of conventional banks but

630
A. Zins, L. Weill Economic Modelling 64 (2017) 626–637

Table 3
Main estimations. Panel estimations with random effects. The dependent variable is the risk indicator at the top of the column. t-statistics appear in parentheses below estimated
coefficients. *, **, *** denote an estimate significantly different from 0 at the 10%, 5% or 1% level. Definitions of all variables used are presented in the Appendix.

Z-score Loan loss reserves Loan loss provisions Impaired loans

(1) (2) (3) (4) (5) (6) (7) (8)

Islamic −0.716 10.29** 1.139 −1.955 0.459* 0.141 0.374 0.237

(−0.27) (2.63) (1.05) (−1.60) (2.38) (0.51) (0.28) (0.15)

Basel II 2.055 6.594** 1.954*** 0.898* −0.041 −0.155 2.212*** 2.175***

(0.94) (2.65) (5.07) (2.09) (−0.30) (−1.01) (4.35) (3.92)

Islamic×Basel II _ −17.27*** _ 4.709*** _ 0.483 _ 0.178

(−3.77) (5.52) (1.60) (0.14)

Size 1.420 1.061 −1.956*** −1.961*** −0.059 −0.051 −1.992*** −1.990***

(1.90) (1.43) (−8.37) (−8.41) (−1.11) (−0.96) (−6.64) (−6.64)

Loans to assets 0.0053 0.0083 −0.173*** −0.172*** −0.025*** −0.025*** −0.198*** −0.198***
(0.10) (0.16) (−13.46) (−13.49) (−6.66) (−6.74) (−10.84) (−10.86)

Cost to income 0.0277 0.0347 0.032*** 0.030*** −0.006** −0.007** 0.016 0.0160
(0.77) (0.97) (4.52) (4.23) (−2.77) (−2.86) (1.50) (1.50)

GDP growth 0.336 0.303 0.0022 0.004 −0.056*** −0.056*** −0.036 −0.036
(1.57) (1.41) (0.07) (0.13) (−4.64) (−4.61) (−0.90) (−0.90)

Rule of law −0.530 0.243 0.528 0.404 0.013 −0.006 0.589 0.587
(−0.51) (0.23) (1.64) (1.25) (0.18) (−0.09) (1.34) (1.33)

Inflation −0.117 −0.179 0.025 0.034 0.050*** 0.051*** 0.115** 0.115**

(−0.64) (−0.99) (0.94) (1.25) (4.87) (4.97) (3.16) (3.16)

HHI −20.730 −22.55 −8.952*** −9.509*** −1.290 −1.274 −12.66*** −12.65***

(−1.62) (−1.78) (−3.38) (−3.61) (−1.65) (−1.63) (−3.72) (−3.71)

Intercept 20.170 18.820 38.980*** 40.510*** 3.681*** 3.753*** 43.730*** 43.740***

(1.77) (1.67) (11.34) (11.79) (4.66) (4.76) (9.62) (9.62)

R² 0.010 0.029 0.174 0.173 0.074 0.076 0.251 0.252

N of banks 501 501 471 471 477 477 385 385
N of obs. 1976 1976 2258 2258 2262 2262 1699 1699

increase it for Islamic banks. They expand credit risk, when measured
with the loan loss reserves ratio, for both types of banks but to a higher
degree for Islamic banks.
We interpret this finding by the fact that conventional banking
regulation is not explicitly designed to reduce risks taken by Islamic
banks. Consequently, it contributes to diminishing insolvency and
credit risks mostly for conventional banks and, as such, widens the
gap in risk between conventional banks and Islamic banks at the
expense of the latter. Higher depositor discipline in Islamic banks
related to profit-and-loss sharing contracts and higher equity levels for
these banks due to liquidity problems contributes to generating a
stronger impact of Basel II standards on conventional banks. In
addition, Basel II rules on market discipline are expected to play a
stronger role in conventional banks, in line with the fact that Islamic
banks must obey religious principles on transparency.
With respect to the control variables, we observe several interesting
results on the factors explaining bank risk for our sample of countries
with an Islamic banking presence. We observe a negative and sig-
nificant sign for bank size in estimations with Loan loss reserves and
Impaired loans. This result supports the view that a larger bank size
reduces bank risk because of gains in economies of scale or greater
diversification of bank activities. The ratio of loans to total assets is
significantly negative in estimations with the three credit risk indica-
tors, suggesting that a higher share of loans in the balance sheet
diminishes credit risk.
When considering country-level control variables, inflation tends to
strengthen credit risk, as seen with the significantly positive coefficient
for this variable in estimations with Loan loss provisions and Impaired
loans. The Herfindahl index has a significantly negative impact on
credit risk when measured with loan loss reserves or impaired loans
ratios, which is in line with the view that greater bank concentration
reduces bank risk (Berger et al. 2009).
4.2. Additional estimations
Our main finding is that the implementation of Basel II standards
tends to make Islamic banks riskier than conventional banks. We can
question whether this finding stands regardless of the bank size.
Namely, Čihák and Hesse (2010) and Abedifar et al. (2013) have
found evidence that the differences in risk between Islamic and
conventional banks differ according to the size of the bank. In line
with their findings, it is therefore of prime interest to investigate
whether the impact of Basel II differs for small and large banks. We
examine this hypothesis by performing additional estimations. We use
the median in terms of total assets to split the full sample into two
subsamples: small banks and large banks. We then redo our regres-
sions for each subsample to verify whether the results differ. We now
only perform the specification with the interaction term Islamic×Basel
II because we focus on the sign and significance of this coefficient,
which gives information on the differentiated impact of Basel II
standards on both types of banks. The estimations for these subsam-
ples are presented in Table 4.

631
A. Zins, L. Weill Economic Modelling 64 (2017) 626–637

Table 4
Estimations by size. Panel estimations with random effects. The dependent variable is the risk indicator at the top of the column. t-statistics appear in parentheses below estimated
coefficients. *, **, *** denote an estimate significantly different from 0 at the 10%, 5% or 1% level. Definitions of all variables used are presented in the Appendix.

Z-score Loan loss reserves Loan loss provisions Impaired loans

Small banks Large banks Small banks Large banks Small banks Large banks Small banks Large banks

Islamic 7.648 13.16* −5.051* −1.277 −0.461 0.769* −0.330 0.914

(1.44) (2.34) (−2.20) (−1.64) (−1.18) (2.14) (−0.09) (0.63)

Basel II 7.540* 6.093 0.344 0.867** −0.553* −0.163 1.369 1.468**

(2.04) (1.77) (0.37) (2.97) (−2.13) (−1.05) (1.03) (2.86)

Islamic×Basel II −17.83** −18.63** 12.27*** 1.638** 1.203* 0.0152 0.880 −0.371

(−2.73) (−2.83) (6.19) (2.91) (2.44) (0.05) (0.24) (−0.36)

Size −0.845 3.054* −3.634*** −0.847*** 0.0099 −0.228* −2.873*** −1.902***

(−0.56) (2.22) (−7.22) (−3.89) (0.10) (−2.27) (−3.96) (−4.97)

Loans to assets −0.0164 0.0809 −0.197*** −0.140*** −0.026*** −0.027*** −0.214*** −0.198***
(−0.24) (0.95) (−9.07) (−13.65) (−5.44) (−5.04) (−6.37) (−10.14)

Cost to income 0.0491 −0.0330 0.0281* 0.008 −0.008* −0.011** 0.0201 0.030*
(1.17) (−0.48) (2.48) (1.23) (−2.52) (−3.24) (1.17) (2.01)

GDP growth 0.0748 0.584 0.0515 −0.028 −0.024 −0.070*** −0.0943 0.051
(0.24) (1.90) (0.86) (−1.21) (−1.02) (−5.75) (−1.06) (1.38)

Rule of law 0.689 −1.160 −0.211 0.237 −0.043 0.057 0.232 0.741
(0.48) (−0.73) (−0.35) (1.09) (−0.41) (0.56) (0.24) (1.82)

Inflation −0.198 −0.391 0.0647 −0.013 0.085*** −0.0201 0.329*** −0.158***

(−0.81) (−1.31) (1.35) (−0.58) (5.02) (−1.64) (4.63) (−3.83)

HHI −25.39 −7.438 −10.47** −3.424 −0.490 −2.416 −11.97* −5.677

(−1.66) (−0.34) (−2.59) (−1.21) (−0.49) (−1.81) (−2.06) (−1.21)

Intercept 43.96* −9.383 64.42*** 24.36*** 2.954* 7.158*** 55.98*** 42.10***

(2.15) (−0.40) (9.15) (6.89) (2.06) (4.39) (5.33) (6.74)

R² 0.031 0.037 0.174 0.165 0.106 0.029 0.285 0.151

N of banks 285 265 265 258 268 262 185 237
N of obs. 880 1096 1017 1241 1000 1262 619 1080

Our main finding is that the differentiated impact of Basel II
standards on bank risk for Islamic and conventional banks is not
influenced by bank size. When considering the insolvency risk, the
interaction term Islamic×Basel II — which was significantly negative
for all banks with the full sample — is significantly negative with regard
to the Z-score for small banks and large banks. When considering
credit risk, the interaction term Islamic×Basel II —which was sig-
nificantly positive for all banks with the full sample — is significantly
positive with Loan loss reserves for small banks and large banks. The
interaction term was not significant when using Impaired loans as the
credit risk indicator for all banks and is still not significant when we
consider small and large banks separately.
The only exception is when considering Loan loss provisions as the
credit risk indicator. The interaction term was not significant when all
banks were pooled together. At this point, we see that the interaction
term is significant and positive at the 10% level for small banks but is
not significant for large banks. Hence, we only observe some differ-
ences related to bank size with the loan loss provisions ratio in the
sense that Basel II standards would increase risk for Islamic banks
more than for conventional banks — but only for small banks.
The conclusion of the estimations by size is that, overall, Basel II
standards do not influence the risk of small and large banks differently.
Our main finding — that they contribute to making Islamic banks
riskier than conventional banks — is not dependent on the size of the
bank.
4.3. Robustness tests
Our main results have been confirmed by using different indicators
measuring bank risk and by the estimations by group size. In addition,
we check the robustness of our results by testing the influence of
country variables in our estimations. The set of country variables can
influence the results in various ways, such as omitting variables or
correlations with the market share of Islamic banks in the country.
We perform three new estimations. First, we include country
dummy variables to control for country differences and remove the
four country-level control variables (GDP growth, Rule of law,
Inflation, HHI). We are then able to test the influence of constant
cross-country differences on our results. Second, we simultaneously
consider country dummy variables and the four country-level control
variables. Third, we skip all country variables. The results are reported
in Tables 5 and 6. We again perform only the specification with the
interaction term Islamic×Basel II because we are interested in the sign
and significance of this coefficient.
All the estimations confirm our previous results. For the three new
specifications of country variables, we observe that the interaction term
is significantly negative with Z-score, significantly positive with Loan
loss reserves, and is not significant with Loan loss provisions and
Impaired loans. Hence, our key finding that Basel II standards make
Islamic banks riskier than conventional banks is not affected by the set
of country variables.

632
A. Zins, L. Weill Economic Modelling 64 (2017) 626–637

Table 5
Robustness check (1/2). Panel estimations with random effects. The dependent variable is the risk indicator at the top of the column. t-statistics appear in parentheses below estimated
coefficients. *, **, *** denote an estimate significantly different from 0 at the 10%, 5% or 1% level. Definitions of all variables used are presented in the Appendix.

Z-score Loan loss reserves

(1) (2) (3) (4) (5) (6)

Islamic 4.590 4.716 9.130* −3.073* −3.498** −1.646

(1.08) (1.11) (2.37) (−2.34) (−2.68) (−1.35)

Basel II 6.293* 6.614* 7.594** 1.993*** 1.340** 1.506***

(2.20) (2.16) (3.18) (4.72) (3.05) (3.62)

Islamic×Basel II −14.81** −14.84** −16.30*** 4.699*** 5.150*** 4.306***

(−3.19) (−3.18) (−3.69) (5.38) (6.02) (4.96)

Size 0.912 0.795 1.238 −2.245*** −2.287*** −1.866***

(1.21) (1.05) (1.80) (−9.12) (−9.23) (−8.46)

Loans to assets 0.042 0.038 0.0247 −0.176*** −0.166*** −0.181***

(0.71) (0.64) (0.47) (−13.18) (−12.52) (−14.08)

Cost to income 0.023 0.018 0.0392 0.021** 0.029*** 0.021**

(0.65) (0.51) (1.10) (2.93) (4.12) (3.01)

GDP growth 0.228 0.0137

(0.99) (0.44)

Rule of law 3.963 0.612

(1.16) (1.24)

Inflation −0.117 0.028

(−0.60) (1.01)

HHI −29.950 −11.110***

(−1.45) (−3.95)

Intercept 13.32 14.00 12.82 49.66*** 50.55*** 40.40***

(0.96) (0.79) (1.22) (10.35) (10.04) (12.31)

Country dummies Yes Yes No Yes Yes No

R² 0.1369 0.1384 0.0253 0.324 0.3194 0.1769
N of banks 501 501 501 471 471 471
N of obs. 1980 1976 1980 2267 2258 2267

5. Conclusion less sensitive to the risk-reducing characteristics of the Basel II

In this paper, we investigate how the implementation of Basel II
standards can influence the risk of Islamic banks relative to conven-
tional banks. The expansion of Islamic banking raises questions
regarding its impact on financial stability. We further elaborate the
work on the relationship between Islamic banking and risk by
examining the impact of Basel II regulation on risk for Islamic and
conventional banks.
We find that Basel II standards have a different impact on risk for
Islamic banks and conventional banks. They contribute to reducing the
insolvency risk of conventional banks but enhance it for Islamic banks.
They increase credit risk when measured with the loan loss reserves
ratio for both types of banks but more for Islamic banks. We
consequently support the view that the Basel II regulation enlarges
the gap in risk between conventional banks and Islamic banks at the
expense of Islamic banks. This conclusion stands for small and large
banks.
We explain this finding by the fact that Basel II has generally been
designed to reduce the risks taken by conventional banks. The specific
features of Islamic banks, profit-and-loss sharing contracts and re-
quirements for greater transparency, make these financial institutions
standards.
Basel II standards have been built using conventional banking
features as the benchmark. The main objective of banking regulation is
to reduce risk in the banking system. Thus, our aim was to check
whether the international regulatory framework also reaches this goal
of stability when implemented in Islamic banks. Our results show that
Basel II standards make Islamic banks riskier than conventional banks.
This means that the stability goal of banking regulation might not be
reached for Islamic banking. Basel II regulation lacks suitable stan-
dards that would reach the specific features of Islamic banks. Indeed,
the Basel II framework does not address the risks relevant to the
Islamic financial assets. The policy implications of our results are then
threefold. First, if Islamic banking expands at the expense of conven-
tional banking, this situation could hamper financial stability in
countries with Basel II standards. Second, implementing Basel II
standards could deteriorate financial stability in countries with high
levels of Islamic banking development. Finally, the prudential autho-
rities should consider the specific features of the Islamic financial
industry when building regulatory standards. The relationship between
Islamic banking and risk is not independent of the regulation.

633
A. Zins, L. Weill Economic Modelling 64 (2017) 626–637

Table 6
Robustness check (2/2). Panel estimations with random effects. The dependent variable is the risk indicator at the top of the column. t-statistics appear in parentheses below estimated
coefficients. *, **, *** denote an estimate significantly different from 0 at the 10%, 5% or 1% level. Definitions of all variables used are presented in the Appendix.

Loan loss provisions Impaired loans

(1) (2) (3) (4) (5) (6)

Islamic 0.0894 0.0077 0.356 −0.517 −0.884 0.611

(0.28) (0.02) (1.25) (−0.28) (−0.49) (0.37)

Basel II 0.503** 0.153 0.0068 3.857*** 2.578*** 3.252***

(2.88) (0.86) (0.04) (6.86) (4.53) (5.90)

Islamic×Basel II 0.386 0.497 0.236 0.030 0.430 −0.143

(1.19) (1.59) (0.77) (0.02) (0.34) (−0.11)

Size −0.0407 −0.0125 −0.089 −2.406*** −2.264*** −2.045***

(−0.71) (−0.22) (−1.78) (−7.55) (−7.11) (−7.17)

Loans to assets −0.034*** −0.031*** −0.028*** −0.213*** −0.186*** −0.217***

(−7.88) (−7.36) (−7.35) (−10.66) (−9.45) (−11.77)

Cost to income −0.008*** −0.005* −0.010*** −0.006 0.014 −0.004

(−3.46) (−2.28) (−3.98) (−0.56) (1.34) (−0.38)

GDP growth −0.043*** −0.010

(−3.34) (−0.24)

Rule of law −0.176 0.255

(−0.88) (0.34)

Inflation 0.055*** 0.096**

(5.04) (2.58)

HHI −1.815 −13.820***

(−1.73) (−3.71)

Intercept 5.311*** 5.012*** 4.387*** 58.24*** 56.75*** 47.36***

(5.29) (4.28) (5.76) (9.73) (8.89) (10.84)

Country dummies Yes Yes No Yes Yes No

R² 0.152 0.143 0.046 0.327 0.322 0.237
N of banks 477 477 477 385 385 385
N of obs. 2271 2262 2271 1708 1699 1708

Appendix A.1. Description of variables

Variable Definition

Dependent
variables
Z-score It is equal to [ROA + CAR]/[SD(ROA)]. ROA is the return on assets. CAR is the ratio of equity capital to assets. SD(ROA) is
the standard deviation of ROA. Source: author's calculations based on Bankscope.
Loan loss reserves The ratio of loan loss reserves to gross loans. Source: Bankscope.
Loan loss The ratio of loan loss provisions to gross loans. Source: Bankscope.
provisions
Impaired loans The ratio of impaired loans to gross loans. Source: Bankscope.
Explanatory
variables
Islamic Dummy variable equal to one if the bank is Islamic, to zero elsewise. Source: Bankscope.
Basel II Dummy variable equal to one if Basel II regulation is implemented in the country, to zero elsewise. Sources: FSI Survey
from the Bank for International Settlements, the "Bank Regulation and Supervision" Survey from the World Bank, and
Central Banks.
Size Logarithm of total assets. Source: Bankscope.
Loans to assets Share of net loans in total assets. Source: Bankscope.
Cost to income Cost to income ratio. Source: Bankscope.
Country-level
variables
GDP growth Annual percentage growth rate of GDP at market prices in constant 2005 U.S. dollars. Source: World Development
Indicators.

634
A. Zins, L. Weill Economic Modelling 64 (2017) 626–637

HHI Herfindahl–Hirschmann Index measure of bank concentration defined as the sum of the squares of the market shares of all
firms within the industry. Source: Author's calculations based on BankScope.
Inflation Inflation rate measured by the annual percentage change of the consumer price index. Source: World Development
Indicators.
Rule of law It captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular
the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and
violence. Transformed to be ranged from 0 to 10 with higher values associated with greater rule of law. Source: Worldwide
Governance Indicators.

Appendix A.2. List of banks by type and by country

Islamic banks:

• Bahrain: ABC Islamic Bank (E.C.), Al-Salam Bank-Bahrain B.S.C., Albaraka Banking Group B.S.C., Albaraka Islamic Bank BSC, Arcapita Bank
B.S.C., Bahrain Islamic Bank B.S.C., Bank Alkhair BSC, Citi Islamic Investment Bank, First energy bank, Global Banking Corporation BSC, Gulf
Finance House BSC, Ibdar Bank BSC, International Investment Bank B.S.C., Investors Bank BSC, Khaleeji Commercial Bank, Kuwait Finance
House, Seera Investment Bank BSC, Venture Capital Bank BSC.
• Bangladesh: Al-Arafah Islami Bank Ltd., First Security Islami Bank Limited, ICB Islamic Bank Limited, Islami Bank Bangladesh Limited,
Shahjalal Islami Bank Ltd, Social Islami Bank Ltd.
• Brunei: Bank Islam Brunei Darussalam Berhad.
• Egypt: Al Baraka Bank Egypt SAE, Faisal Islamic Bank of Egypt.
• Gambia: Arab Gambian Islamic Bank.
• Indonesia: Bank Syariah Mandiri, PT Bank BCA Syariah, PT Bank BNI Syariah, PT Bank BRI Syariah, PT Bank Jawa Barat Banten Syariah, PT
Bank Maybank Syariah Indonesia, PT Bank Mega Syariah, PT Bank Muamalat Indonesia Tbk, PT Bank Panin Syariah, PT Bank Victoria Syariah.
• Iran: Bank Keshavarzi-Agricultural Bank of Iran, Bank Maskan, Bank Mellat, Bank Melli Iran, Bank Pasargad, Bank Refah, Bank Saderat Iran,
Bank Sarmayeh, Bank Sepah, Bank Tejarat, Bank of Industry and Mine, Eghtesad Novin Bank PJSC-EN Bank, Export Development Bank of Iran,
Karafarin Bank, Parsian Bank, Saman Bank.
• Iraq: Al-Bilad Islamic Bank for Investments and finance Iraq, Cihan Bank for Islamic Investment and finance Iraq, Elaf Islamic Bank,
International Development Bank Iraq, Iraqi Islamic Bank for Investment & Development, Kurdistan International Bank for Investment and
Development, National Islamic Bank.
• Jordan: Islamic International Arab Bank, Jordan Dubai Islamic Bank, Jordan Islamic Bank.
• Kuwait: A'Ayan Leasing & Investment Company, Aref Investment Group, Boubyan Bank KSC, First Investment Company K.S.C.C., International
Investor Company, K.S.C.C., Investment Dar Co (The), Kuwait Finance House, Kuwait International Bank, Rasameel Structured Finance
Company Kuwait.
• Lebanon: Al Baraka Bank SAL, Arab Finance House Holding SAL, Arab Finance House sal (Islamic Bank).
• Malaysia: Affin Islamic Bank Berhad, Al Rajhi Banking & Investment Corporation, Alkhair International Islamic Bank Berhad, Alliance Islamic
Bank Berhad, AmIslamic Bank Berhad, Asian Finance Bank Berhad, Bank Islam Malaysia Berhad, Bank Muamalat Malaysia Berhad, CIMB
Islamic Bank Berhad, HSBC Amanah Malaysia Berhad, Hong Leong Islamic Bank Berhad, Kuwait Finance House (Malaysia) Berhad, Maybank
Islamic Berhad, OCBC Al-Amin Bank Berhad, Public Islamic Bank Berhad, RHB Islamic Bank Berhad, Standard Chartered Saadiq Berhad.
• Mauritania: Banque Al Wava Mauritanienne Islamique, La Banque Islamique de Mauritanie-BIM.
• Oman: Bank Nizwa SAOG.
• Pakistan: Albaraka Bank (Pakistan) Limited, Albaraka Islamic Bank BSC (EC) - Pakistan, BankIslami Pakistan Limited, Burj Bank Limited,
Dubai Islamic Bank Pakistan Limited, First Habib Modaraba, First National Bank Modaraba, Meezan Bank Limited, Standard Chartered
Modaraba.
• Palestinian territories: Arab Islamic Bank, Palestine Islamic Bank.
• Qatar: First Finance Company (Q.S.C.), Masraf Al Rayan (Q.S.C.), Qatar International Islamic Bank, Qatar Islamic Bank SAQ.
• Saudi Arabia: Al Rajhi Bank, Alinma Bank, Bank AlBilad, Islamic Development Bank.
• Sudan: Al Baraka Bank Sudan, Al Salam Bank, Al Shamal Islamic Bank, Arab Sudanese Bank Co Ltd, Bank of Khartoum, Faisal Islamic Bank
(Sudan), Industrial Development Bank, Islamic Co-operative Development Bank, National Bank of Sudan, Sudanese Islamic Bank, Tadamon
Islamic Bank, United Capital Bank.
• Syria: Cham Islamic Bank SA, Syria International Islamic Bank.
• Tunisia: Albaraka Bank Tunisia.
• Turkey: Albaraka Turk Participation Bank-Albaraka, Asya Katilim Bankasi AS-Bank Asya, Kuveyt Turk Katilim Bankasi A.S.-Kuwait, Turkiye
Finans Katilim Bankasi AS.
• United Arab Emirates: Abu Dhabi Islamic Bank, Ajman Bank, Al Hilal Bank PJSC, Amlak Finance PJSC, Dubai Islamic Bank PJSC, Emirates
Islamic Bank PJSC, Noor Bank, Sharjah Islamic Bank, Tamweel PJSC.
• Yemen: Islamic Bank of Yemen for Finance & Investment, Saba Islamic Bank,Shamil Bank of Yemen & Bahrain, Tadhamon International
Islamic Bank.

Conventional banks:

• Bahrain: Addax Bank BSC, Ahli United Bank BSC, Alubaf Arab International Bank, Arab Banking Corporation BSC, Awal Bank, BBK B.S.C., BMI
Bank BSC, Bahrain Commercial Facilities Company, Future Bank B.S.C., Gulf International Bank BSC, International Banking Corporation BSC,
National Bank of Bahrain.

635
A. Zins, L. Weill Economic Modelling 64 (2017) 626–637

• Bangladesh: AB Bank Ltd, Agrani Bank Limited, BASIC Bank Ltd-Bangladesh, BRAC Bank Limited, Bangladesh Commerce Bank Ltd, Bank Asia
Limited, City Bank Ltd, Dhaka Bank Limited, Dutch-Bangla Bank Limited, Eastern Bank Limited, Export Import Bank of Bangladesh Limited,
HSBC Bank Bangladesh, IFIC Bank Bangladesh Limited, Jamuna Bank Ltd, Janata Bank Limited, Meghna Bank Limited, Mercantile Bank
Limited, Mutual Trust Bank, NRB Bank Limited, National Bank Limited, National Credit and Commerce Bank Ltd, One Bank Limited, Premier
Bank Ltd (The), Prime Bank Limited, Pubali Bank Limited, Rupali Bank Limited, Sonali Bank Limited, South Bangla Agriculture & Commerce
Bangladesh, Southeast Bank Limited, Standard Bank Limited, Trust Bank Ltd (The), United Commercial Bank Ltd, Uttara Bank Limited.
• Brunei: Baiduri Bank.
• Egypt: Abu Dhabi Islamic Bank, Ahli United Bank (Egypt) SAE, Arab African International Bank, Arab Banking Corporation - Egypt, Arab
International Bank, BLOM Bank Egypt SAE, Bank Audi SAE, Bank of Alexandria, Banque Misr SAE, Banque du Caire SAE, Barclays Bank - Egypt
S.A.E., Commercial International Bank (Egypt), Credit Agricole Egypt, Egyptian Gulf Bank, Emirates National Bank of Dubai SAE, HSBC Bank
Egypt SAE, National Bank of Egypt, Piraeus Bank Egypt SAE, Société Arabe Internationale de Banque (SAIB), Suez Canal Bank, The National
Bank of Kuwait - Egypt, Union National Bank - Egypt SAE, United Bank (The).
• Gambia: Access Bank (Gambia) Limited, Ecobank Gambia Ltd, Guaranty Trust Bank (Gambia) Limited, International Commercial Bank
(Gambia), Keystone Bank (Gambia) Limited, Skye Bank (Gambia) Limited, Standard Chartered Bank Gambia Limited, Trust Bank Limited (The
Gambia).
• Indonesia: ABN Amro Bank NV, Bank Antardaerah, Bank Artha Graha Internasional Tbk, Bank BNP Paribas Indonesia PT, Bank BPD Jateng-
Bank Pembangunan Daerah, Bank Bumi Arta, Bank Central Asia, Bank Commonwealth, Bank DBS Indonesia, Bank Danamon Indonesia Tbk,
Bank Ekonomi Rahardja, Bank Ganesha, Bank ICB Bumiputera, Bank Internasional Indonesia Tbk, Bank Mandiri (Persero) Tbk, Bank Maspion
Indonesia, Bank Mega TBK, Bank Mestika Dharma, Bank Metro Express, Bank Mutiara Tbk, Bank Negara Indonesia (Persero), Bank Nusantara
Parahyangan, Bank OCBC NISP Tbk, Bank Pan Indonesia Tbk PT-Panin Bank, Bank Pembangunan Daerah Kalimantan Timur, Bank
Pembangunan Daerah Sumatera Selatan, Bank Permata Tbk, Bank QNB Kesawan, Bank Rabobank International Indonesia, Bank Rakyat
Indonesia (Persero) Tbk, Bank Royal Indonesia, Bank SBI Indonesia, Bank Sinarmas, Bank Tabungan Negara (Persero), Bank Tabungan
Pensiunan Nasional PT, Bank UIB, Bank UIB, Bank Victoria International TBK (PT), Bank Windu Kentjana International Tbk, Citibank NA,
HSBC Indonesia, ING Indonesia Bank, PT BPD Jawa Barat dan Banten Tbk, PT Bank ANZ Indonesia, PT Bank Agris, PT Bank Andara, PT Bank
Bukopin, PT Bank CIMB Niaga Tbk, PT Bank CTBC Indonesia, PT Bank Capital Indonesia, PT Bank DKI, PT Bank Himpunan Saudara 1906, PT
Bank ICBC Indonesia, PT Bank Index Selindo, PT Bank KEB Hana, PT Bank Mayapada Internasional TBK, PT Bank Mizuho Indonesia, PT Bank
Of India Indonesia Tbk, PT Bank Pembangunan Daerah Riau, PT Bank Pembangunan Daerah Sulawesi Utara, PT Bank Pundi Indonesia, PT
Bank Rakyat Indonesia Agroniaga Tbk, PT Bank Resona Perdania, PT Bank Sahabat Sampoerna, PT Bank Sumitomo Mitsui Indonesia, PT Bank
Syariah Bukopin, PT Bank UOB Indonesia, PT Bank Woori Indonesia, PT. BPD Jawa Timur.
• Iraq: Babylon Bank, Bank of Baghdad, Commercial Bank of Iraq SA, Gulf Commercial Bank, Investment Bank of Iraq SA Co, National Bank of
Iraq, North Bank, Rafidain Bank, Rasheed Bank, Sumer Commerical Bank PSC, Union Bank of Iraq, Warka Bank For Investment and Finance.
• Jordan: Arab Bank Group (Combined), Arab Banking Corporation (Jordan), Bank of Jordan Plc, Cairo Amman Bank, Capital Bank of Jordan,
Housing Bank for Trade & Finance (The), Jordan Ahli Bank Plc, Jordan Commercial Bank, Jordan Kuwait Bank, Société générale de Banque-
Jordanie.
• Kuwait: Al Ahli Bank of Kuwait (KSC), Burgan Bank SAK, Commercial Bank of Kuwait SAK (The), Financial Group of Kuwait KSC, Gulf Bank
KSC (The), National Bank of Kuwait S.A.K., Warba Bank.
• Lebanon: Ahli International Bank SAL, Al-Mawarid Bank SAL, Arab African International Bank, Audi Saradar Private Bank SAL, B.L.C. Bank
SAL, BBAC SAL, BLOM Bank SAL, Bank Audi SAL, Bank Saderat Iran, Bank of Beirut SAL, Bankmed SAL, Banque BEMO SAL, Banque Lati SAL,
Banque Libano-Francaise, Banque Misr Liban, Banque Nationale de Paris Intercontinentale Lebanon, Banque Pharaon & Chiha SAL, Banque de
Crédit National, Banque de l'Habitat SAL, Banque de l'Industrie et du Travail SAL, Byblos Bank SAL, CSCBank SAL, CreditBank SAL, Crédit
Libanais SAL, Emirates Lebanon Bank SAL, Federal Bank of Lebanon SAL, Fenicia Bank SAL, First National Bank SAL, Fransabank SAL, HSBC
Bank Middle East, IBL Bank SAL, Jammal Trust Bank SAL, Lebanese Swiss Bank SAL (The), Lebanon & Gulf Bank SAL, MEAB SAL, National
Bank of Kuwait (Lebanon) SAL, Near East Commercial Bank SAL, North Africa Commercial Bank SAL, Rafidain Bank, Saudi Lebanese Bank SAL,
Saudi National Commercial Bank, Societe Financiere du Liban SAL, Société Générale de Banque au Liban, Société Nouvelle de la Banque de Syrie
et du Liban, Standard Chartered Bank SAL, Syrian Lebanese Commercial Bank SAL, United Credit Bank SAL.
• Malaysia: Affin Bank, Alliance Bank Malaysia Berhad, AmBank (M) Berhad, AmINTERNATIONAL (L) Ltd, BNP Paribas Malaysia Berhad,
Bangkok Bank Berhad, Bank of America Malaysia Berhad, Bank of China (Malaysia) Berhad, Bank of Nova Scotia Berhad, Bank of Tokyo-
Mitsubishi UFJ (Malaysia), CIMB Bank (L) Limited, CIMB Bank Berhad, Citibank Berhad, Citibank Malaysia (L) Ltd, Deutsche Bank (Malaysia)
Bhd, Gensource Berhad, HSBC Bank Malaysia Berhad, Hong Leong Bank Berhad, India International Bank (Malaysia) Bhd, Industrial and
Commercial Bank of China, JP Morgan Chase Bank Berhad, Kumpulan Wang Persaraan (Diperbadanka), Malayan Banking Berhad - Maybank,
Maybank International (L) Ltd, Mizuho Bank (Malaysia) Berhad, National Bank of Abu Dhabi Malaysia Berhad, OCBC Bank (Malaysia) Berhad,
Public Bank Berhad, RHB Bank (L) Ltd, RHB Bank Berhad, Royal Bank of Scotland Berhad (The), Standard Chartered Bank Malaysia Berhad,
United Overseas Bank (Malaysia) Bhd.
• Mauritania: Attijari Bank Mauritanie, Bank Al Muamalat Assahiha-BMS SA, Banque Al Amana SA, Banque Mauritanienne pour le Commerce
International, Banque Nationale de Mauritanie, Banque pour le Commerce et L'Industrie, Chinguitty Bank, Generale de Banque de Mauritanie
pour l'Investissement et le Commerce, Orabank Mauritanie.
• Oman: Bank Dhofar SAOG, Bank Muscat SAOG, Bank Sohar SAOG, HSBC Bank Oman, National Bank of Oman (SAOG), Oman Arab Bank
SAOG.
• Pakistan: Allied Bank Limited, Askari Bank Limited, Bank Al Habib, Bank Alfalah Limited, Bank of Khyber, Bank of Punjab, Faysal Bank Ltd,
First Dawood Investment Bank Limited, First Women Bank Limited, Habib Bank Limited, Habib Metropolitan Bank Limited, JS Bank Limited,
KASB Bank Limited, MCB Bank Limited, NIB Bank Ltd, National Bank of Pakistan, Samba Bank Limited, Silkbank Limited, Soneri Bank
Limited, Standard Chartered Bank (Pakistan), Summit Bank Limited, United Bank Limited.
• Palestinian territories: Bank of Palestine Plc, Palestine Commercial Bank.
• Qatar: Ahli Bank QSC, Al Khalij Commercial Bank, Barwa Bank, Commercial Bank of Qatar (The) QSC, Doha Bank, International Bank of Qatar
QSC, Qatar National Bank.
• Saudi Arabia: Arab National Bank, Bank Al-Jazira, Banque Saudi Fransi, National Commercial Bank (The), Riyad Bank, Samba Financial Group,

636
A. Zins, L. Weill Economic Modelling 64 (2017) 626–637

Saudi British Bank (The), Saudi Hollandi Bank, Saudi Investment Bank (The).
• Sudan: Agricultural Bank of Sudan, Al Jazeera Sudanese Jordanian Bank, Animal Resources Bank, Blue Nile Mashreq Bank Ltd, Byblos Bank
Africa Ltd, Elnilein Bank, Farmers Commercial Bank, Omdurman National Bank, Saudi Sudanese Bank, Savings & Social Development Bank,
Sudanese Egyptian Bank, Sudanese French Bank (The), Workers' National Bank.
• Syria: Al Baraka Bank Syria SA, Arab Bank Syria SA, Bank Audi Syria, Bank of Jordan-Syria, Bank of Syria and Overseas SA, Banque Bemo Saudi
Fransi SA, Byblos Bank Syria SA, Commercial Bank of Syria, Fransabank-Syria SA, International Bank for Trade and Finance Syria, Qatar
National Bank - Syria SA, Real Estate Bank, Syria Gulf Bank SA.
• Tunisia: Alubaf International Bank, Amen Bank, Arab Banking Corporation - Tunisie, Arab Tunisian Bank, Attijari Bank, Banque Franco-
Tunisienne, Banque Internationale Arabe de Tunisie, Banque Nationale Agricole, Banque Tunisienne de Solidarité, Banque Zitouna, Banque de
Tunisie, Banque de l'Habitat, Citibank NA, North Africa International Bank - NAIB, Société Tunisienne de Banque, Union Bancaire pour le
Commerce et l'Industrie Tunisie, Union Internationale de Banques.
• Turkey: ABN Amro Bank, Adabank AS, Akbank TAS, Alternatifbank AS, Anadolubank AS, Arab Turkish Bank-Arap Turk Bankasi, Bankpozitif
Kredi ve Kalkinma Bankasi AS, Birlesik fon Bankasi AS, Burgan Bank AS, Citibank AS, Denizbank AS, Deutsche Bank AS, Fibabanka AS,
Finansbank AS, HSBC Bank AS, ING Bank AS, Merrill Lynch Yatirim Bank AS, Odea Bank AS, Sekerbank TAS, Standard Chartered Yatirim
Bankasi Turk AS, T.C. Ziraat Bankasi AS, Tekstilbank-Tekstil Bankasi AS, Turk Ekonomi Bankasi AS, Turkish Bank AS, Turkiye Garanti Bankasi
AS, Turkiye Halk Bankasi AS, Turkiye Vakiflar Bankasi TAO Turkiye is Bankasi AS, Turkland Bank AS-T- Bank, Yapi Ve Kredi Bankasi AS.
• United Arab Emirates: Abu Dhabi Commercial Bank, Al khaliji France SA, Arab Bank for Investment & Foreign Trade, Bank Melli Iran, Bank of
China Middle East (Dubai) Limited, Bank of Sharjah, Commercial Bank International PSC, Commercial Bank of Dubai PSC, Credit Europe Bank
(Dubai) Ltd, Emirates NBD PJSC, First Gulf Bank, Invest Bank PSC, Mashreqbank PSC, National Bank of Abu Dhabi, National Bank of Fujairah,
National Bank of Ras Al-Khaimah, National Bank of Umm Al-Qaiwain, Union National Bank, United Arab Bank PJSC.
• Yemen: International Bank of Yemen YSC, National Bank of Yemen, Yemen Commercial Bank, Yemen Gulf Bank, Yemen Kuwait Bank for Trade
and Investment.

References 21 (2), 100–112.

Abdul-Majid, M., Saal, D., Battisti, G., 2010. Efficiency in Islamic and conventional
banking: an international comparison. J. Product. Anal. 34, 25–43.
Abedifar, P., Molyneux, P., Tarazi, A., 2013. Risk in Islamic Banking. Rev. Financ. 17,
2035–2096.
Aiyar, S., Calomiris, C., Wiedalek, T., 2014. Does Macro-Pru leak? Evidence from a UK
policy experiment. J. Money Credit Bank. 46 (1), 181–214.
Bae, K., Goyal, V., 2009. Creditor rights, enforcement and bank loans. J. Financ. 64 (2),
823–860.
Baele, F., Farooq, M., Ongena, S., 2014. Of religion and redemption: evidence from
default on Islamic loans. J. Bank. Financ. 44 (7), 141–159.
Beck, T., Demirgüç-Kunt, A., Merrouche, O., 2013. Islamic vs. conventional banking:
business model, efficiency and stability. J. Bank. Financ. 37 (2), 433–447.
Behn, M., Haselmann, R. and Wachtel, P., 2015. Procyclical Capital Regulation and
Lending. J. Financ. 71, 2, 919-956.
Berger, A., DeYoung, R., 1997. Problem loans and cost efficiency in commercial banks. J.
Bank. Financ. 21, 849–870.
Berger, A., Klapper, L., Turk-Ariss, R., 2009. Bank competition and financial stability. J.
Financ. Serv. Res. 35 (2), 99–118.
Bitar, M., Madiès, P., 2013. Les spécificités des banques islamiques et la réglementation
de Bâle III. Rev. d’Economie Financ. 111, 293–310.
Chapra, U., Khan, T., 2000. Regulations and Supervision of Islamic Banks. IRTI, Jeddah.
Chong, B., Liu, M., 2009. Islam. Bank.: Interest-Free Or. Interest-Based? Pac.-Basin
Financ. J. 17, 125–144.
Čihák, M., Hesse, H., 2010. Islamic banks and financial stability: an empirical analysis. J.
Financ. Serv. Res. 38, 95–113.
El Tiby, A.M., 2014. Islamic Banking: How to Manage Risk and Improve Profitability.
Wiley.
El-Hawary, D., Grais, W., Iqbal, Z., 2007. Diversity in the regulation of islamic financial
institutions. Q. Rev. Econ. Financ. 46, 778–800.
Errico, L. and Farahbaksh, M., 1998. Islamic Banking: Issues in Prudential Regulation
and Supervision, IMF Working Paper n°98/30.
Foos, D., Norden, L., Weber, M., 2010. Loan growth and riskiness of banks. J. Bank.
Financ. 34 (12), 2929–2940.
Fungacova, Z., Weill, L., 2013. Does competition influence bank failures? Econ. Transit.
Furlong, F., Keeley, M., 1989. Capital regulation and bank risk-taking: a note. J. Bank.
Financ. 13, 883–891.
Gheeraert, L., 2014. Does Islamic finance spur banking development? J. Econ. Behav.
Organ. 103, 4–20.
Gheeraert, L., Weill, L., 2015. Does Islamic banking development favor macroeconomic
efficiency? Econ. Model. 47, 32–39.
Hakenes, H., Schnabel, I., 2011. Bank size and risk-taking under Basel II. J. Bank.
Financ. 35 (6), 1436–1449.
Imam, P., Kpodar, K., 2016. Islam. Bank.: Good Growth?Econ. Model. 59, 387–401.
Ivashina, V., Scharfstein, D., 2010. Bank lending during the Financial Crisis of 2008. J.
Financ. Econ. 97 (3), 319–338.
Khan, T., Ahmed, H., 2001. Risk Management: An Analysis of Issues in Islamic Financial
Industry. IRTI, Jeddah.
Klomp, J., de Haan, J., 2012. Banking Risk and Regulation: Does One Size Fit All?
Journal of Banking and Finance 36, 3197–3212.
Laeven, L., Levine, R., 2009. Bank governance, regulation and risk-taking. J. Financ.
Econ. 93 (2), 259–275.
Mundlak, Y., 1978. On the pooling of time series and cross section data. Econometrica 46
(1), 69–85.
Rime, B., 2005. Will Basel II lead to a specialization of unsophisticated banks on high-
risk borrowers? Int. Financ. 8 (1), 29–55.
Smolo, E., Hassan, M.K., 2010. Capital Adequacy Requirements for Islamic Financial
Institutions. Islamic Finance: instruments and Markets. Bloomsbury Press, London.
Song, I. and Oosthuizen, C., 2014. . Islamic Banking Regulation and Supervision: Survey
Results and Challenges, IMF Working Paper n°14/220, IMF.
Srairi, S.A., 2010. Cost and profit efficiency of conventional and Islamic Banks in GCC
countries. J. Product. Anal. 34, 45–62.
TheCityUK, 2015. Islamic Finance Report 2015, Financial Market Series, TheCityUK,
London.
Turk-Ariss, R., 2010. Competitive conditions in islamic and conventional banking: a
global perspective. Rev. Financ. Econ. 19 (3), 101–108.
VanHoose, David, 2007. Theories of bank behavior under capital regulation. J. Bank.
Financ. 31 (12), 3680–3697.
Weill, L., 2011. Do Islamic banks have greater market power? Comp. Econ. Stud. 53,
679–693.

637