Black Gold's Price Shock: Are Conventional and Interest Free "Islamic" Banks Equally Vulnerable?

The purpose of this study is to investigate the effects of oil price shocks on credit and insolvency risks for the banking industry within specific banking specializations (conventional, interest free "Islamic", and conventional banks with Islamic windows), from 2000 through 2016, at both the aggregate and country levels in the Gulf Cooperation Council (GCC).

Design/methodology/approach We utilized fixed effects panel regressions to assess credit and solvency risks due to declining oil prices. Our final sample included unbalanced panel data for the banks operating in GCC including Conventional Banks, Islamic Banks and Conventional Banks offering Islamic products.

Our findings show that falling oil prices, during our sample time-frame, increased credit risk for Conventional Banks and Conventional Banks with Islamic windows but not for Islamic Banks. Credit risk also increased for banks operating in Kuwait, Qatar, Saudi Arabia and the United Arab Emirates. Utilizing both accounting-based and marked-based proxies for the insolvency risk, our analysis shows that oil price plunges did not increase insolvency risk of the banking industry regardless of country or bank specializations.

Our findings and insights will be of interest for various stakeholders such as bank managers, corporations (borrowers), analysts, investors and specifically regulators who rely on empirical evidence to develop sound banking polices in sample countries and similar oil dependent economies.