Transition Policy and Banking Stability: A New Approach to Policy Making in Islamic Banking

This study examines the impact of “transition policy” on the stability of islamic banks and answers the question of whether the decrease in the share of loans based on partnership contracts and the increase in the share of loans based on exchange contracts have a direct or indirect impact on the banking stability of islamic countries. due to the different nature of exchange and partnership contracts based on risk and profit, these two types of contracts have different effects on bank stability, and banks can use the transition policy to improve bank stability. in this study, quarterly data of four islamic countries with significant allocation of banking resources in the form of islamic contracts for the years 2014 to 2020 were used in a panel data regression model to investigate the direct or indirect relationship of transition policy to bank stability. the results indicate that the transition policy leads to increased banking stability by increasing the share of partnership facilities and decreasing the share of exchange facilities.