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Open AccessArticle

Life after Debt: The Effects of Overleveraging on Conventional and Islamic Banks

Department of Economics and Finance, Saint Peter’s University, Jersey City, NJ 07306, USA
J. Risk Financial Manag. 2020, 13(6), 137; https://doi.org/10.3390/jrfm13060137
Received: 5 May 2020 / Revised: 8 June 2020 / Accepted: 12 June 2020 / Published: 24 June 2020
(This article belongs to the Special Issue Banking and the Economy)
It is generally argued that Islamic banks are safer than conventional banks. The prime reason is that their product structure is essentially asset-backed financing, while conventional banks rely heavily on leveraging, which was considered one of the main causes of the 2008 global financial crisis. This paper examines the riskiness of Islamic and conventional banks during the 2008 global crisis by measuring overleveraging, defined as the difference between actual and optimal debt. This research conducted empirical analysis on the overleveraging of 20 banks (10 conventional and 10 Islamic banks) from five different countries, namely, Bahrain, Kuwait, Malaysia, the United States, and the United Kingdom. The analysis is double-folded: on the one hand, the results in this paper suggest that excess debt, rather than the mere holding of debt, was the reason behind the severe financial meltdown in 2007–2009; on the other hand, this paper shows that Islamic banks, in most of the countries in context, performed better during the recent crisis, but were subject to the second-round effect of the global crisis around the years of 2011–2013. View Full-Text
Keywords: banking instability; banking sector; Islamic banking; credit flows; financial crisis; excess debt; early warning signals banking instability; banking sector; Islamic banking; credit flows; financial crisis; excess debt; early warning signals
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Issa, S. Life after Debt: The Effects of Overleveraging on Conventional and Islamic Banks. J. Risk Financial Manag. 2020, 13, 137.

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