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Islamic banking stability amidst the COVID-19 pandemic: the role of digital financial inclusion

Hasanul Banna (Ungku Aziz Centre for Development Studies, Universiti Malaya Faculty of Economics and Administration, Kuala Lumpur, Malaysia)
M. Kabir Hassan (Economics and Finance, University of New Orleans, New Orleans, Louisiana, USA)
Rubi Ahmad (Department of Finance and Banking, Universiti Malaya, Kuala Lumpur, Malaysia)
Md Rabiul Alam (Department of Language and Literacy Education, Universiti Malaya Faculty of Education, Kuala Lumpur, Malaysia)

International Journal of Islamic and Middle Eastern Finance and Management

ISSN: 1753-8394

Article publication date: 18 August 2021

Issue publication date: 19 April 2022

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Abstract

Purpose

This paper aims to explore the role of digital financial inclusion (DFI) in stabilizing the Islamic banking sector amidst the current COVID-19 pandemic.

Design/methodology/approach

This study has used the Panel-Corrected Standard Errors (PCSE), Two-Stage Panel Least Squares-Instrumental Variables (2SLS-IV) and Two-Step System Generalized Method of Moments (2SGMM) dynamic panel estimation method to investigate the DFI-Islamic banking stability nexus using an unbalanced panel data of 65 Islamic banks from six countries over the period 2011–2020.

Findings

The result suggests that greater implementation of DFI promotes Islamic banking stability, which reduces the default risk of the banks in the studied region. Consequently, incorporating DFI into the Islamic banking sector encourages inclusive economic growth that can keep the financial sector sustainable even in a crisis period like the current COVID-19 pandemic.

Originality/value

Unlike previous studies, the authors have focused mainly on DFI and the Islamic banking sector. This is one of the first to explore how DFI contribute to the stability and productivity of the Islamic banking sector during the pandemic. Also, this study provides fresh evidence on how the supply and demand side of DFI impact Islamic banking stability.

Keywords

Acknowledgements

The authors acknowledge helpful comments from the three anonymous referees. This study was partially funded by the Faculty of Business and Accountancy, Universiti Malaya, Malaysia (Grant Number: GPF043A-2020). The usual disclaimer applies.

Funding: Grant Number: GPF043A-2020

Citation

Banna, H., Hassan, M.K., Ahmad, R. and Alam, M.R. (2022), "Islamic banking stability amidst the COVID-19 pandemic: the role of digital financial inclusion", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 15 No. 2, pp. 310-330. https://doi.org/10.1108/IMEFM-08-2020-0389

Publisher

:

Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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