On the Reputation of Islamic Banks: a Panel Data Qualitative Econometrics Analysis

This study investigates the issue of reputation for Islamic banks. Bank reputation can either be modelled using a direct approach based on Game Theory (Chemmanur and Fulghieri in J Financ 49:57–79, 1994) or through an indirect approach that investigates linkages between conventional and Islamic banks. Adopting the indirect test approach, we propose a binary measure of Islamic Banks (IBs) reputation by testing their dynamic interactions with regard to conventional banks. Interestingly, we propose different qualitative econometric specifications to capture the drivers of IBs’ reputation. Using panel data for 10 major conventional banks and 10 Islamic banks over the period April 2006 – February 2013 (about 17,800 observations), we show that reputation probability can significantly increase in line with Islamic banking performance, while excess risk taken by Islamic bankers will decrease it. Further, we show that an environment with high global financial risk -induced for example by an increase in conventional product risk- has a negative effect on IBs’ reputation.