Islamic Financial Institutions and Stability: An Empirical Analysis

Abstract

Using econometric data, this study investigates the internal and external factors influencing the financial stability of Islamic banks from 2011 to 2022. We identify the critical elements that impact the capital adequacy ratio, liquidity, size, governance, and degree of concentration of Islamic banks in order to determine their financial stability. The study concludes that while size, governance, and degree of concentration have a detrimental effect on Islamic banks’ financial stability, the capital adequacy ratio and liquidity have a beneficial effect. The report suggests that Islamic banks increase their capital and liquidity in order to support their financial stability. This is in line with other studies, such as an empirical analysis of Islamic banks and financial stability conducted by the IMF, which discovered that, on average, small Islamic banks have stronger finances than small commercial banks, and large commercial banks have stronger finances than large Islamic banks.