Do we need bigger Islamic banks? An assessment of bankstability

In this paper, we evaluate from the stability point of view whether Islamic banks shouldstay small or should be bigger. More specifically, in relating bank stability to bank size, weexamine potential non-linear effects of size on bank soundness and the roles regulationplays in strengthening or weakening the size-stability relation using a panel sample of45 Islamic banks from 13 countries. Our results show that larger Islamic banks are morestable, at least when they surpass a certain threshold size. As regards regulation, activityrestrictions and capital stringency play a role in strengthening the stability-size relation. Bycontrast, the positive stability-size relation is weakened with more private monitoring andsupervisory power. Hence, our results point to the benefits of having bigger Islamic banks.They also suggest that, to further enhance the stability implications of larger Islamic banks,policymakers should focus on improving regulation in the forms of activity restrictions andcapital stringency.