Political Stability, Regulatory Quality, and Macroeconomic Factors Associated with Financial Sustainability of Islamic Banks in the MENA Region
DOI:
https://doi.org/10.26740/al-uqud.v10n02.p161-178Keywords:
Financial sustainability, Regulatory paradox, Regulatory quality, MENA region, Political stabilityAbstract
This study examines determinants of financial sustainability in Islamic banks across six MENA countries, focusing on institutional factors (political stability, regulatory quality) and macroeconomic conditions (GDP growth, inflation, unemployment). Using unbalanced panel data from 22 Islamic banks (2016-2024, 198 observations), fixed and random effects models are applied. Financial sustainability is measured via the Z-score, which integrates profitability (ROA), capitalization (equity-to-assets), and income volatility. Data are sourced from Bloomberg and World Bank databases. Political stability is positively associated with sustainability, while regulatory quality exhibits a paradoxical negative impact, suggesting conventional regulatory approaches may misalign with Islamic finance principles. Among macroeconomic variables, only unemployment shows a significant positive association; GDP growth and inflation are statistically insignificant. The study identifies a “regulatory paradox” in Islamic banking, where higher regulatory quality is negatively associated with sustainability due to misalignment with Sharia principles and risk-sharing mechanisms.
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