Alaa Alaabed; Abbas Mirakhor; Abul Mansur Mohammed Masih (INCEIF, 2015)
Risk shifting is, axiomatically, absent in an ideal Islamic banking system, where equity holders are expected to share assets' upside and downside potential with investment account holders (depositors). The Islamic banking model, thus, provides unique paradigm with risk sharing at its core. However, the present formation of Islamic banking has grown out of conventional banking and uses many of its techniques and instruments. Whereas significant research has delineated the theoretical foundations of Islamic banking and its axiomatic characteristics, empirical assessment of the implications of present form Islamic banking is relatively limited and often focused on issues of efficiency, profitability and stability. The main objective of this dissertation is to make the initial attempt to empirically investigate the risk shifting behaviour in Islamic banks in dual banking systems of OIC member states1, using Merton (1977) and Duan et al. (1992) models. Also, unlike existing literature, this study controls for dynamic bias by applying the two-step dynamic difference GMM to an unbalanced panel of 272 conventional banks and 75 Islamic banks from 2002 to 2013 ...
