Financial Stability of Islamic and Conventional Banks in Saudi Arabia: Evidence using Pooled and Panel Models

The financial crises are considered the major challenges facing the prosperity and stability of the banking system and menace its stability. Several studies on financial and banking sector have demonstrated that Islamic banks have shown more financial robustness and stability compared to conventional banks, over periods of financial crises. This research aims to measure the stability extent of the Saudi Arabia banks including Islamic banks and conventional banks using quarterly data from 2005 to 2011. This period is characterized by the global financial crisis shocks (2007-2008). The sample used is composed of six banks including two Islamic banks (AlRajhi Bank and AlBilad Bank) and four traditional banks (Riyad Bank, Saudi Investment Bank, Saudi British Bank and Saudi American Bank). This sample represents an important part of 64% of the Saudi banking sector and covers close to two thirds of banks whose shares are traded on the Saudi stock market. The research focuses on three types of variables related to bank, banking system and macroeconomic levels. The paper is based on quantitative tools using panel regression and pooled regression to model the z-score index for testing the banks stability in Saudi Arabia. The panel data model shows that Islamic banks reduce relatively the value of the financial stability index; meanwhile, they contribute efficiently to enhance the financial stability through the diversification of their assets. The findings indicate those Riyad Bank and SAMBA groups support efficiently the financial stability of banking sector, while AlRajhi bank has a positive but moderate role in enhancing the banking sector stability. The Saudi banking sector has relatively less level of competitiveness, that affecting negatively the financial stability. The limited representation of Islamic banks in the Saudi banking sector jeopardizes any efforts to improve the financial stability index