BANK RESILIENCE OVER THE BUSINESS CYCLE IN A DUAL BANKING SYSTEM

Zaid Zaid, Ajid Ur Rehman

Abstract


The study aims to analyze the stability and resilience of conventional and Islamic banks over a complete business cycle in a dual banking system, Pakistan, with the objective to investigate whether Islamic and conventional banks maintain high level of performance in terms of profit and cost efficiency, in times of economic distress. It gathers bank level and macroeconomic quarterly unbalanced panel data for the period 2006 to 2016. The study is based on a dynamic panel data model and applies dynamic System GMM estimators as suggested by Arellano and Bover (1995) and Blundell and Bond (1998) for analysis purpose. Further, in order to add credence to the outcomes, a robustness check in the form of a two-stage least squares (2SLS) is performed. Findings of the study affirm the procyclical behavior of the dual banking system in Pakistan. However, Islamic banks are found to be more procyclical as compared to the conventional ones, which implies the former to be relatively less resilient to economic disruptions, and would suffer from intense decline in performance as the economy tends to shrink.

Keywords: Business Cycle, Islamic Banks, Conventional Banks, Bank Resilience.

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References


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