Are Islamic Banks More Resilient During Financial Panics?

This paper uses data from Pakistan to compare the resilience of Islamic banks and conventional banks during a financial panic. In particular, it examines the impact of the banking sector crisis that occurred in Pakistan in 2008 on the deposit and lending behavior of Islamic and conventional banks. The paper finds that Islamic bank’s branches and subsidiaries experience less deposit withdrawals than conventional banks and some even recorded increase in deposits during this panic. This led to an average inflow of deposits into Islamic branches and subsidiaries over the period. The paper suggests that lending by Islamic banks is less sensitive to the changes in deposits than it is for their conventional counterparts. It also contributes to the literature on the evidence of transmission of financial sector shock to the real sectors of the economy. The paper covers the following sections in detail:

• Background on Islamic banking in Pakistan;
• Discussion on the financial panic and liquidity crunch that occurred in Pakistan in September-October 2008;
• Discussion on data analysis techniques used and econometric specifications;
• Results with a comparative analysis of the performance of Islamic banks and conventional banks;
• Concluding remarks and scope of future research.