Do Islamic banks fail more than conventional banks?

• Published in: Journal of international financial markets, institutions & money Vol. 50; pp. 135 - 155
• Main Authors: Alandejani, Maha, Kutan, Ali M., Samargandi, Nahla
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.09.2017
• Subjects: Continuous-time duration model; Conventional banking; Discrete-time duration model; GCC; Islamic banking; Survival analysis; Islamic banking; Survival analysis; GCC; Continuous-time duration model; Discrete-time duration model; Conventional banking
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2017.05.007

•The survival time of Islamic and conventional banks in the Gulf Cooperation Council countries is investigated.•Analysis is based on the discrete-time duration models.•Islamic banks have a higher incidence rate of failure and therefore a shorter survival time.•The effect of covariates on survival time differs between Islamic and conventional banks. This study aims to investigate the survival time of Islamic and conventional banks in the Gulf Cooperation Council (GCC) countries, taking into account the impact of the global financial crisis by employing the discrete-time duration models. The empirical application is comprised of 56 commercial banks based in five GCC countries over the period 1995–2011. In addition, to examine the differences between banks, a range of explanatory variables from both the bank-level and macro-level are included in several models. The results of hazard and survivor functions indicate that Islamic banks have a higher incidence rate of failure and therefore a shorter survival time than conventional banks. The discrete-time duration model (or the complementary log-log model) findings for the all-banks-pooled model confirm that the hazard rate increases with Islamic banks. Furthermore, the analysis of each bank type reveals that the effect of explanatory variables on survival time differs between Islamic and conventional banks. For instance, increasing the net interest margin ratio causes the hazard rate in Islamic banks to rise, whereas this rate is lowered in conventional banks. Among the macro-level variables, a higher inflation rate leads to a higher hazard rate; improving the regulatory quality correspondingly reduces the hazard rate of survival time in the banking sector of countries within the GCC.