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Islamic Banking and Financial CrisisReputation, Stability and Risks$
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Habib Ahmed, Mehmet Asutay, and Rodney Wilson

Print publication date: 2013

Print ISBN-13: 9780748647613

Published to Edinburgh Scholarship Online: May 2014

DOI: 10.3366/edinburgh/9780748647613.001.0001

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Stability of Islamic Banks: A Comparison of Conventional and Islamic Banks

Stability of Islamic Banks: A Comparison of Conventional and Islamic Banks

(p.58) 4 Stability of Islamic Banks: A Comparison of Conventional and Islamic Banks
Islamic Banking and Financial Crisis

Matthias Verbeet

Edinburgh University Press

This chapter compares the financial stability of Islamic banks with that of conventional banks in terms of performance based on measures such as return on equity and changes in capital structure such as core capital ratios, the equity capital to total capital ratio, and the risk-weighted capital ratio. It first reviews relevant literature on financial stability and the risks to which banks, especially Islamic banks, are exposed. It then examines stability by financial ratio analysis from three perspectives related to liquidity, performance and risk. Using the example of two British banks, it shows how ratio analysis can be used to evaluate financial stability. It also considers the financial ratios of the Malaysian banks. The results suggest that Islamic banks are not any more stable than conventional banks, and that the latter can become more stable if they operate significant Islamic windows as part of risk diversification. Finally, the stability of banks in times of distress is enhanced by personnel changes among the executive management.

Keywords:   financial stability, Islamic banks, return on equity, capital structure, capital ratios, liquidity, risk, financial ratios, personnel changes, executive management

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