A Survival Analysis of Islamic bank failure risk

Pappas, Vasilis and Izzeldin, Marwan and Fuertes, Ana-Maria (2012) A Survival Analysis of Islamic bank failure risk. Working Paper. UNSPECIFIED. (Unpublished)

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Abstract

This paper compares failure risk of Islamic and conventional commercial banks using survival-time models that avoid the need for a bank stability proxy such as the conventional z-score. The analysis is based on 421 banks from 20 countries observed between 1995 and 2010. Both the unconditional Kaplan-Meier estimator of the survival function and the Cox Proportional Hazards model, that conditions on accounting and macroeconomic indicators, suggest that Islamic banks have lower failure risk than conventional banks. We find significant differences between these bank types in the sensitivity of failure risk to various factors including leverage and capitalization ratios, net interest, cost to income, banking sector concentration and inflation. One implication of our findings relates to the effective design of Early Warning Systems of failure and regulatory frameworks for each bank type.

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