Political systems and the financial soundness of Islamic banks |
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| Institution: | 1. Department of Economics, University of California Los Angeles, NBER, and Federal Reserve Bank of Minneapolis, United States;2. Finance Area, Anderson School of Management, University of California, Los Angeles and NBER, United States;3. Department of Economics, University of California Los Angeles, and NBER, United States;1. Department of Finance, John Molson School of Business, Concordia University, 1455 Blvd. de Maisonneuve West, Montréal, QC H3G 1M8, Canada;2. Department of Economics and Finance, University of New Orleans, New Orleans, LA 70148, USA;3. College of Business and Public Management, University of La Verne, 1950 Third St., La Verne, CA 91750, USA |
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| Abstract: | We investigate whether and how political systems affect the financial soundness of conventional and Islamic banks. Using factors extracted from principal component analysis, we find that Islamic banks underperform their conventional counterparts in more democratic political systems but outperform them in hybrid and Sharia’a-based legal systems. The findings reflect the challenges Islamic banks face in Western countries in terms of perception, financial infrastructure, and regulatory constraints while mirroring the recognition of their specificities and their cultural and religious compliance with Sharia’a law in Muslim countries. The findings are robust to a battery of alternative estimation techniques and methods of correcting standard errors. |
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| Keywords: | Islamic banks Financial soundness Democracy Legal systems |
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