Does diversification affect financial stability? Evidence from Islamic and conventional banks. (27th December 2022) - Asif, Rabia
The repeated waves of the global financial crisis have impacted financial industry stability, especially commercial banks. Resultantly, banking stakeholders have taken steps to enhance the stability of these institutions. Diversification is considered effective in resolving the effects of the crisis. In this regard, a shift towards non-traditional revenue sources acts to enhance resilience. Bank size is important in shaping the relationship between diversification and financial stability. Previous literature has documented enough evidence on bank size and stability to show high resilience for large banks. Islamic banks are not as large as conventional banks, whether their resilience is equal to conventional banks? Using panel data from the banking sector, this study determines the impact of diversification on banking stability regarding bank size. The study results approve the full mediation of bank size on diversification and financial stability relations. Further, Islamic banking is found to be as resilient as conventional banking in the sample countries.