Financial Stability of Islamic Finance

Abstract

The aim of this paper is to study the stability of the Islamic financial system. To do this, we are interested in the scoring method and the volatility of stock market indices.

The first empirical study includes all the components of the financial system, in particular, banks, insurance companies, leasing, factoring and investments companies.

The results of this study suggest that, Islamic finance saw a loss of 0.014% of its stability score, in 2007, against 0.43% and 1.675% for conventional finance, respectively in 2007 and 2008. In contrast, during the period of the Arab revolutions only Islamic finance depreciated.

In order to refine our research, we used the autoregressive conditional heteroscedasticit models to study the volatility of the DJ index and the DJIM index. The empirical results reveal that, the DJIM index is less volatile than the DJ index of emerging countries, Europe, Asia and the United States. However, the DJ Global Index is less volatile than the DJIM index, which seems paradoxical compared to previous results. From then on, we studied the volatility of the two indices before, during and after the crisis. The empirical results reveal that, the DJIM index is much more stable than the DJ index during the crisis (2007-2009). On the other hand, before and after the crisis (2002-2006 and 2010-2015), the DJ Global index is more stable but the difference is insignificant.