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Panel modeling of z-score: evidence from Islamic and conventional Saudi banks

Panel modeling of z-score: evidence from Islamic and conventional Saudi banks This paper aims to measure the stability extent of the banking sector in Saudi Arabia, including Islamic and conventional banks (CBs), using quarterly data.Design/methodology/approachThe paper uses seemingly unrelated regressions to estimate the determinants of the z-score.FindingsThe panel data model shows that Islamic banks (IBs) reduce the financial stability index relatively; meanwhile, they contribute efficiently to enhance the financial stability through the diversification of their assets. The Saudi banking sector exhibits strong concentration affecting the financial stability negatively.Research limitations/implicationsThe paper’s topic can be extended to cover the recent period.Practical implicationsThe limited presence of IBs in the Saudi banking sector jeopardizes any effort to improve the financial stability.Social implicationsBy attracting more clients, IBs would contribute more to the financial stability in the Saudi economy. Also, the monetary authority has to expand the share of IBs in the financial system at least 50-50 compared to CBs.Originality/valueThe z-score is mostly analyzed with yearly data; in this paper we use quarterly data to describe at infra-annual frequency the variability of the z-score index. Also, we consider in detail the statistical properties of the banks’ data. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Islamic and Middle Eastern Finance and Management Emerald Publishing

Panel modeling of z-score: evidence from Islamic and conventional Saudi banks

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1753-8394
DOI
10.1108/imefm-04-2018-0122
Publisher site
See Article on Publisher Site

Abstract

This paper aims to measure the stability extent of the banking sector in Saudi Arabia, including Islamic and conventional banks (CBs), using quarterly data.Design/methodology/approachThe paper uses seemingly unrelated regressions to estimate the determinants of the z-score.FindingsThe panel data model shows that Islamic banks (IBs) reduce the financial stability index relatively; meanwhile, they contribute efficiently to enhance the financial stability through the diversification of their assets. The Saudi banking sector exhibits strong concentration affecting the financial stability negatively.Research limitations/implicationsThe paper’s topic can be extended to cover the recent period.Practical implicationsThe limited presence of IBs in the Saudi banking sector jeopardizes any effort to improve the financial stability.Social implicationsBy attracting more clients, IBs would contribute more to the financial stability in the Saudi economy. Also, the monetary authority has to expand the share of IBs in the financial system at least 50-50 compared to CBs.Originality/valueThe z-score is mostly analyzed with yearly data; in this paper we use quarterly data to describe at infra-annual frequency the variability of the z-score index. Also, we consider in detail the statistical properties of the banks’ data.

Journal

International Journal of Islamic and Middle Eastern Finance and ManagementEmerald Publishing

Published: Aug 21, 2019

Keywords: Islamic banks; Saudi Arabia; Financial crisis; Financial stability; Z-score model; C12; C23; G21; G28; G33

References