Credit Deepening: A Cross-Country Variations in the Dual Banking System

Abstract

Research Question: This study explores the shared goal of Islamic and conventional banks across 20 countries in achieving credit deepening for sustained business success. Accordingly, it asks: what are the key bank-specific determinants of credit deepening in dual banking systems across different countries, and how do these determinants vary between Islamic and conventional banks across the credit growth distribution? Motivation: Credit deepening is central to banking activities, yet its role in fostering economic growth or increasing financial fragility remains debated. While conventional and Islamic banks share the same goal of expanding credit, they differ in operational principles, capital structures, and risk appetites. Prior studies have mainly focused on linear relationships and single-country settings, thereby overlooking heterogeneity across countries and bank types. This study addresses these gaps by employing a non-linear quantile approach to capture variations in determinants across the credit deepening distribution. Idea: This research aims to uncover the main determinants of credit deepening for Islamic and conventional banks, while accounting for geographical location and temporal distributions. Data: The study examines commercial banking institutions across 20 Asia Pacific countries operating under dual-banking systems, comprising both Islamic and conventional banks. The final sample consists of 558 banks, yielding 2,618 observations over a 10-year period (2011–2020), subject to data availability. All annual data were sourced from the FitchConnect database. Method/Tools: The study utilizes non-linear quantile regression with a moment approach to address data heterogeneity and normality concerns. The study examines the impact of geographical location, banks’ specialization, and size differences on credit deepening. Employing a robust Quantile Regression via Moment model mitigates potential endogeneity and non-normality issues. Findings: Quantile analysis reveals distinct relationships and magnitudes of banks’ liquidity and size in influencing credit deepening. Contributions: The findings offer insights for policymakers to formulate relevant strategies, fostering stronger credit deepening for banks across diverse countries. The study contributes by (1) introducing a quantile-based framework for analyzing credit deepening in dual banking systems, (2) revealing threshold effects and non-linearities in the determinants of credit growth, and (3) providing bank-type-specific policy recommendations to enhance sustainable credit expansion.