Financial Stability of Islamic Banks: Empirical Evidence

The present paper seeks to analyze the financial stability of Islamic banks in Malaysia. Using the time frame of 2008 to 2012, the paper adopts Z-score analysis, Liquidity ratio, Nonperforming financing as well as Credit risk ratio to assess financial stability of Islamic banks. The relevant data were collected from the annual reports of sixteen Islamic banks in Malaysia as obtainable in the bank-scope data base. The finding of the paper reveals that the Z-score is relatively high and thus suggests that Islamic banks at the moment are on the whole financially stable. The paper however finds that Islamic banks at present grant excessive financing while the total assets they invest on financing are on the increase. This therefore portrays an impending financial crisis for Islamic banks if their current financing mechanism is not revisited. The implication of this paper is that Islamic banks have the potentials of absorbing shock and are not likely to experience financial mess in the immediate term provided their liquidity ratios and loan to deposit ratios are regularly kept under check.