Abstract
Recent banking literature provides mixed results about the relationship between
competition and financial stability. The franchise value paradigm supports a negative
relationship, whereas the risk-shifting paradigm supports a positive relationship. This
study investigates the dynamic relationship between competition and stability for Islamic
and Conventional Banks (IBS and CBs) in Pakistan using the data of 38 IBs and CBs
over 17 years. Bank Z-score and Lerner index are used to measure financial stability and
competition, respectively. Results are estimated by employing system GMM estimator
which controls the problem of endogeneity and reverse causality. The competition
fragility paradigm is supported for the banks in Pakistan. The adverse effect of
competition on stability is stronger for IBs. Though CBs are found to be less stable than
IBs. The study has policy implications for regulators on devising the relevant
competition policy. For the stance of developing Sharia-compliant banking, the study
supports this rationale from the lens of banking sector stability
Muhammad Shahzad Ijaz, Fazal Muhammad, Mahnoor Hanif. (2020) Do Financial Stability and Competition Differ in Islamic and Conventional Banks in Pakistan? A System-GMM Approach, NUML International Journal of Business & Management, Volume 15, Issue 1.
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