Are Islamic banks more resilient to financial crises? A critical analysis of Islamic and conventional banks with particular reference to Saudi Arabia

This study seeks to determine whether the regulatory basis and operational structure of the Islamic financial model position it as the front-runner in terms of sustainability and resilience to financial crises. A critical review of the extant literature reveals that Islamic banks have performed better than conventional banks during economic shocks because Islamic banks are less exposed to risks. However, this study maps the profile of financial institutions that are generally resilient to financial crises, and notes that Islamic banks do not match this profile. Nonetheless, an assessment of the risk management strategies of Islamic banks reveals that they are in fact less likely to trigger instability when using profit-loss sharing schemes. The study utilises existing statistical data as part of the inter-disciplinary understanding of the effects of financial crises. The data is derived from various surveys and reports that chart overall performance considering the stressful financial environment of 2007-09 and beyond. This is complemented with original qualitative data that has been collected through surveys that identify the perceptions of key stakeholders in the banking sector on the resilience of their respective banking systems and how those systems could ultimately be improved. The traditional tripartite analysis of knowledge is adopted. The analysis at a generic level reveals that banks using the profit-loss sharing schemes match the profile of institutions that are generally more resilient to financial crises. The analysis at the level of the State reveals that where Islamic banks are accommodated within the same regulatory framework as conventional banks, the former are more resistant to financial shock. Lastly, the analysis at the level of individual banks reveals that the stress testing frameworks of the conventional banks may be rated as less effective than those of Islamic banks.