For the first time, this study investigates whether, in mimicking conventional banks, Islamic banks have become less stable than their theoretical equivalent: cooperative banks in Europe. Theoretically, the prohibition of interest should have pushed Islamic banks towards mutuality and profit-sharing, which have been argued as stabilising. In practice, however, banks are pushed for growth under a debt-driven commercial banking model, which is not only antithetical to the Shariah but is also destabilising. This may explain why empirical findings are still divergent in Islamic banking stability studies. Our study employs the generalised method of moments (GMM) system to compare the stability of 37 Islamic banks against 1,536 cooperative banks in Europe during the 2008 crisis and post-non-crisis years. Interestingly, we found consistent and significant evidence that Islamic banks are less stable than cooperative banks in both macroeconomic conditions. This has significant policy implications, the most important of which is to steer reform efforts away from refurbishing Islamic commercial banks and towards building an entirely new Islamic cooperative bank, based on the model in Europe.

This study, which compares the German system with Malaysia in the hope of improving Islamic finance, uncovers four paradoxes. Germany is chosen because its focus on mutuality and small enterprises, at the expense of profit maximisation, not only embodies the Shariah principles of justice and social welfare but also makes the system more stable. The banks' profitability and stability between 2006 and 2014 are compared. This covers their performances before, during and after the global financial crisis ...

Despite the increase in studies on Islamic banks, there is a number of issues. Firstly, the comparison is with commercial banks although in reality, Islamic banks have strayed from their theoretical foundations of mutuality and profit-sharing. A more apt comparison is thus with cooperative banks, which share similar theoretical foundations with Islamic banks. Secondly, this comparison may unlock the stability puzzle for Islamic banks. While theoretically they are argued to be stabilising, empirically, the evidence is mixed. Several works concur with the notion of superior stability in Islamic compared to conventional banks but of late, there are increasing findings to the contrary. This study thus seeks to first ascertain whether in mimicking conventional banks, Islamic banks have become just as unstable, or worse, during the 2008 financial crisis and the 'new normal' years between 2010 and 2015 ...

Islamic banking's profit-maximising fervour, building upon the use of interest-resembling products, has raised concerns about its Shariah authenticity and financial stability. While early Islamic economists envisioned an industry built on values of mutuality and participation, architects of Islamic banking have chosen to replicate interest-based conventional banking for the purpose of fast growth. This study has two objectives. First, to narrate the history of Islamic banking, from the theories postulated to the beginnings of the industry. This builds an understanding of why 'Islamic' banking operates as it does currently, which has implications for Shariah compliance and financial stability. It is suggested that the mimicking of conventional banks may cause instability since unlike commercial banks, 'Islamic' banks face Shariah constraints. This leads to the second objective, which is to analyse the cooperative banking model, which has been described as the closest theoretical model to Islamic banking. Specifically, this study focuses on the model in Europe which, despite its challenges, has managed to silence critics in the way it contributes to communal welfare and financial stability, especially during credit crunches when commercial banks are known to retreat from markets. This first study of a functioning cooperative banking model, in the context of Islamic banking, may thus offer lessons for Islamic banking reform.