Empirical evidence on the risk management tools practised in Islamic and conventional banks

Purpose – The purpose of this paper is to analyse the factors responsible for the rise and growth of smaller Islamic banks in the last decade. Design/methodology/approach – Z-score analysis is used to test the stability of both smaller and larger Islamic banks. The pooled ordinary least square (OLS) regression technique is also employed to examine the factors. Findings – The results of this paper show higher z-scores for smaller Islamic banks indicating that the latter have tended to be more stable than larger Islamic banks over the last decade. Z-scores tend to increase with bank size for large Islamic banks, but decrease with size for the small Islamic banks. The OLS regression results confirm that larger banks have greater income diversity than do the smaller banks. Originality/value – Islamic banking represents a radical departure from conventional banking, and from the viewpoint of corporate governance; it embodies a number of interesting features since equity participation, risk and profit-and-loss sharing arrangements form the basis of Islamic financing. Using econometric techniques, this paper provides valuable insights as to the stability of Islamic banks and the factors responsible for the growth of smaller such institutions that has been witnessed in the last decade.Economic growth, Islamic banking, Regression analysis, Stability, Z-score