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For a sample of banks operating in 19 developing countries, we provide robust evidence that compliance with Basel Core Principles (BCPs) has a strong positive effect on the Z-score of conventional banks but the effect is less pronounced on the Z-score of Islamic banks. The results appear to be driven by capital ratios, a component of Z-score for the two bank types. Individual chapters of BCPs also suggest a positive effect on the stability of conventional banks while this effect is reduced on the stability of Islamic banks. The findings highlight some of BCPs shortcoming of not accounting for the specificities of Islamic banks. This is important since the Islamic Financial Services Board (IFSB) published in 2015 new recommendations for complementing the BCPs standards with the Core Principles for Islamic Finance Regulation (CPIFRs) standards, reflecting the importance of integrating Islamic banks’ specificities with an objective improving bank financial soundness in countries where the two bank types operate.
Author(s):
Mohammad Bitar
John Molson School of Business, Concordia University
Canada
Sami Ben Naceur
International Monetary Fund
United States
Rym Ayadi
HEC Montreal
Canada
Thomas Walker
John Molson school of Business
Canada