The impact of oil shocks on bank profitability in net oil-importing countries: A comparison between Islamic, investment and conventional banking

Banks take a central position in the financial sector, playing many essential roles, such as facilitating the transmission mechanism of monetary policy and acting as intermediaries between savers and borrowers. On the other hand, oil is one of the primary inputs of economic activities, and its fluctuation becomes the major source of economic instability, causing major microeconomic and macroeconomic indicators to deteriorate. Because of their critical roles in the economy, their relationship attracts the attention of researchers, bankers, market participants, policymakers, and regulators. There is a growing body of literature that has examined the link between oil shocks and bank performance. However, the previous studies focused on the effect of oil shocks on bank profitability by concentrating on either oil-exporting countries or country-specific studies. The current study endeavors to fill the gap in the literature by extending the previous research. It investigates the impact of oil shocks on bank performance from the perspective of net oil-importing countries, paying close attention to the differences among bank types. The dynamic panel method (generalized method of moments) is used to control for the persistence of profitability and endogeneity in the model. The study found that oil shocks seem to have both direct and indirect impacts on bank profitability. Inflation, economic growth, and real effective exchange rate serve as the transmission channel between oil shocks and bank performance, and this varies according to bank types. Knowing the co-movement of oil shocks with bank performance can help bankers, government officials, and monetary authorities in setting strategies and developing effective policies for the stability of the financial sector.