The purpose of this study is to examine the impact of micro, small and medium enterprises (MSMEs) financing on the stability of Saudi Arabia�s dual banking system. This study uses the correlated random effects (CRE) model, which is selected based on the Mundlak test. The CRE model is more appropriate for small sample data sets. MSME financing data is sourced from the annual reports of Saudi Arabia�s three full-fledged Islamic banks (FIBs) and six hybrid conventional banks (HCBs) over the six-year study period from 2018 to 2023. The findings show that MSMEs financing has a statistically significant positive impact on the overall banks Ln Z-Score (stability) and a negative impact on nonperforming loans (credit risk) emphasizing the positive impact of MSMEs financing on the dual banking system stability. However, when the authors disaggregate and estimate separately for FIBs and HCBs, the authors find that micro and small-sized enterprises (MiSEs) financing positively impact the stability of FIBs, but only small-sized enterprises financing reduces their credit risk. For HCBs, however, only medium and microsized financing have statistically significant positive impact on their stability and a negative impact on their credit risk, respectively. These findings are economically significant and remain robust when the authors estimate for both on-and-off-balance sheet, and MiSEs and SMEs financing for overall banks. The findings offer some important policy insights for policymakers and regulators of developing countries with dual banking systems in general and Saudi Arabia in particular that MSMEs financing enhances the stability of dual banking system and reduces their credit risk. This favorable impact is more evident for FIBs. The fact that Saudi Arabia FIBs having larger portfolios of MSMEs financing relative to their conventional counterparts have impacted their stability favorably which implies that policies favoring MSMEs financing can enhance both the financial sector and the underlying real sector in which MSMEs operate by reducing income inequality, enhancing financial inclusion and fostering entrepreneurship, which will consequently lead to long-term financial stability and to sustainable economic growth and societal development. To the best of the authors� knowledge, this is the first study that empirically examines the impact of MSMEs financing on the stability and credit risk of a dual banking system. The study provides new evidence substantiating that bank MSMEs� financing can be a win-win proposition.

Purpose This study aims to examine the impact of liquidity creation per capita of tri-banking system and dual banking system on real economic output. Design/methodology/approach This study applies the feasible generalized least square framework on the data set of 12 countries, 8 with tri-banking system and 4 with dual banking system over the 2013-2022 period. Findings The findings show that for countries with tri-banking system, only liquidity creation by full-fledged Islamic Banks (FIBs) and hybrid conventional banks (HCBs) spurs real output, with the impact of HCBs being greater than that of FIBs. Nonetheless, for countries with dual banking system, both FIBs' and pure CBs' (PCBs) liquidity creation fosters real output. However, the impact of PCBs is slightly greater. Finally, Granger causality results confirm only the positive impact of the tri-banking system's liquidity creation on real output. Practical implications For countries with tri-banking system, only HCBs' and FIBs' liquidity creation spurs real output. However, for countries with dual banking system, liquidity created by both FIBs and PCBs fosters real output. However, only liquidity created by tri-banking system has a unidirectional Granger causality with real output. Originality/value To the best of the authors' knowledge, this is the first study that examines the impact of the banking subsystem liquidity creation on real economic output. Examining the impact of the liquidity created by this banking subsystem on the real economy is important for both regulators and policymakers.

Following the recent global financial crisis, Islamic banks (IBs) have grown rapidly and are found to create more liquidity for the economy relative to their conventional counterparts. Nonetheless, the significance of their impact on real economic output relative to pure conventional banks (PCBs) has not been examined empirically. The aim of this study therefore is to investigate the liquidity creation impact of full-fledged Islamic banks (FIBs) and PCBs on real economic output. We examine 12 Muslim-majority countries over a period of 13 years from 2010 to 2022. We employ both the feasible generalized least square (FGLS) and panel-correlated standard errors models. Our findings show that both FIBs and PCBs liquidity creation per capita have a statistically significant positive impact on real economic output. Notably, FIBs have a marginally higher impact than PCBs. In terms of bank size, our findings show that only large FIBs and PCBs have positive impacts on real output. These findings are robust for both types of banking systems' on- and off-balance sheets liquidity creation components and subsamples including countries where IBs are systematically important. Finally, our findings also indicate a positive bidirectional causality between the liquidity creation of FIBs and real output but a reverse unidirectional causality between PCBs' liquidity creation and real output. Our results imply that policymakers should maintain a clear differentiation between the business models of FIBs and PCBs and act to enhance their liquidity creation to spur real economic output.

We examine the impact of the liquidity creation of Full-fledged Islamic Banks (FIBs) and Hybrid Conventional Banks (HCBs) on real economic output for a sample of 10 countries over the 11-year period from 2012-2022. Using the Feasible Generalized Least Squares (FGLS) framework, we show that both FIBs and HCBs liquidity creation per capita impact real economic output positively. However, HCBs have a greater impact on real economic output than FIBs. These results are statistically and economically significant. We further examine the impact of the liquidity created by both banking systems during the COVID-19 pandemic. Interestingly, for both bank types, liquidity creation has a negative impact on real output during the COVID-19 pandemic. However, in terms of magnitude, the negative impact is more pronounced for the HCBs. We also observe a non-linear impact of liquidity creation on real output, where the non-linearity is more pronounced among the HCBs. As for policy, our results imply that governments should incentivize FIBs to expand their scope and engage more in greenfield financing to have greater impact on real economic output.