Islamic Banking: Steady in Shaky Times?

Abdirahman Mohamed Abdi

Major Professor: Charles K. Rowley

Committee Members: Omar Al-Ubaydli, John N. Paden, IInternational Studies

Enterprise Hall, 318
September 22, 2010, 06:00 AM to 07:00 AM


This dissertation examines whether there is empirical support for the assertion that Islamic banks are more stable than Western banks in general and more particularly during periods of financial crisis. There is relatively little empirical work done in this aspect of Islamic banking. Chapter 1 defines Islamic finance and banking and provides a basis for the selection of countries to be studied. Chapter 2 gives an institutional purview of the current state of Islamic finance and banking in the world with regard to assets size, growth and geographical distribution. Chapter 3 provides an analytical history of Western economic theories of financial crises in the last four centuries while chapter 4 examines issues such as herding, coordination failure and bank runs and then critically evaluates the strength, weakness and potential solution each theory espouses. Chapter 5 presents the theoretical foundation of financial intermediation and how the characteristics of an Islamic bank differ from that of Western banks. Chapter 6 explains how the unique features of Islamic finance manifest in the risk and return continuum and get reflected in financial products and contracts. Chapter 7 critically assesses the advantages and drawbacks of Islamic finance; while Chapter 8 analyzes the origins and evolution of Islamic law and the role major schools of Islamic thought play in interpreting whether a particular transaction or financial instrument is in compliance with the intent and objectives of Islamic principles. The data and the methodology for measuring and testing financial stability are covered in Chapter 9. Chapters 10 and 11 present an analytical history of the financial sector as well as the results of the regressions for Bahrain and Malaysia respectively. Chapter 12 concludes that Islamic banking is less stable than Western banking; however, there are signs that Islamic banking is improving their performance in this respect.