Evaluating the stability policy in the banking industry on the efficiency of the Islamic banking system compared to conventional banking by using the difference in difference estimator

Subject Areas : Islamic finance

Saide Nasibeh Taheri ¹ , Bijan Safavi ^{2 *} , Fatemeh Zandi ³ , Mahnaz Rabiei ⁴

1 - Department of Economics, ST.C., Islamic Azad University, Tehran, Iran.
2 - Department of Economics, ST.C., Islamic Azad University, Tehran, Iran.
3 - Department of Economics, ST.C., Islamic Azad University, Tehran, Iran.
4 - Department of Economics, ST.C., Islamic Azad University, Tehran, Iran.

Received: 2023-12-06 Published : 2025-03-19

Keywords: Banking Stability, Banking System Efficiency, Conventional Banking, Difference-in-Differences Estimation Model, Islamic Banking,

Abstract :

Purpose: The primary aim of this study is to evaluate the impact of stability-oriented policies in the banking industry on the efficiency of the Islamic banking system in comparison with conventional banking.

Research Methodology: To this end, the study employs a Difference-in-Differences (DiD) policy implementation model based on annual data spanning from 1970 to 2021. The treatment group consists of countries with Islamic banking systems, where Islamic banks were officially licensed in 1983, while the control group includes countries with conventional banking sectors.

Findings: The empirical results indicate a positive difference-in-differences effect of policy implementation, estimated at 3.447, for both treatment and control groups. This suggests a relatively successful policy impact in countries such as Iran, Malaysia, Bangladesh, and Saudi Arabia, where Islamic banking systems were institutionalized in 1984. These findings are observed in comparison with conventional banking sectors in countries such as Malaysia, Saudi Arabia, Bahrain, and Turkey. Although the magnitude of the effect remains modest, the adoption of Islamic banking policies appears to contribute to greater stability in the banking industry and improved efficiency of the Islamic banking system.

Originality / Value: This study underscores the stabilizing role of Islamic banking mechanisms, emphasizing their potential contribution to enhancing financial system resilience. Greater banking stability can lead to broader macroeconomic stability, which in turn reduces transaction costs and enhances overall banking system efficiency.

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