Analysis of the resilience of the interest-free finance system against global crises

The opinions, beliefs, and expectations of investors in financial markets are not homogeneous. A financial instrument deemed appropriate for one investor may conflict with the values of another. Therefore, the interest-free finance system was developed to provide financial services for investors with sensitivity to interest and to channel idle funds into the financial system. Based on the principle of profit and loss sharing, the interest-free finance system excludes the element of interest at all stages of its financial operations. According to the 2025 Stability Report published by the Islamic Financial Services Board (IFSB), the global Islamic financial services industry, which was approximately 700 billion USD in 2005, reached 3.88 trillion USD as of 2025, and is projected to reach around 5.9 trillion USD by 2026 if the current trend continues. In the interest-free finance system, participation banks play the most significant role. Owing to their asset-based and risk-sharing structures, participation banks are theoretically considered more resilient to financial shocks. However, empirical evidence from stock market–based studies supporting this claim remains limited, as existing research has predominantly relied on accounting-based performance indicators. Moreover, since most studies focus on a single country or crisis period, the resilience performance of the interest-free finance system has not been comprehensively tested across different geographies and crisis types. This study aims to fill this gap by providing one of the first comprehensive empirical analyses that simultaneously examines multiple countries and successive crisis periods. The aim of this study is to empirically examine the resilience claim of the interest-free finance system from a multi-country and multi-crisis perspective. In this context, commercial and participation banks listed on the stock exchanges of Türkiye, Saudi Arabia, Bahrain, Malaysia, Kuwait, Qatar, the United Arab Emirates, and Jordan-whose data are continuously available-were analyzed based on their daily stock closing prices. A total of seven crises, namely the 2008 Crisis, the Syrian Crisis, 2014 Oil Crisis, Pandemic Crisis, Russia-Ukraine Crisis, and, within the Middle Eastern context, the Israel-Palestine and Israel-Iran Crises, were evaluated in three phases: pre-crisis, crisis, and post-crisis periods. Furthermore, the requirement that all analyzed banks were publicly traded throughout the entire crisis periods was accepted as a primary limitation. In the study, the ARCH-LM test was employed to examine the presence of heteroskedasticity, and the ICSS test was applied to identify structural break dates. Subsequently, the identified break dates were incorporated into the GARCH (1,1) model as dummy variables, and the modeling process was carried out by considering only statistically significant break points. All tests and modeling procedures were conducted using the "R Studio" software. The findings reveal that commercial and participation banks in the examined countries share similar volatility dynamics. It was determined that, across all countries, past shocks and previous-period volatility have a strong influence on current market volatility. In comparative terms, commercial banks exhibit higher sensitivity to shocks but lower volatility persistence compared to participation banks. In contrast, participation banks tend to experience milder initial impacts from shocks, yet their volatility persists for a longer period within the system. These results support the theoretical resilience claim of the interest-free finance system under certain conditions and suggest that participation banks may play a complementary role in maintaining financial stability. The findings are expected to serve as a valuable resource for investors, portfolio managers, financial institutions, and policymakers, particularly in risk management processes during periods of financial turmoil. Moreover, the results are anticipated to contribute to policy and regulatory frameworks aimed at preserving financial stability and building a more resilient system against potential future crises. In this regard, the study provides both a theoretical contribution to the literature and practical implications for policymakers.