Trade, financial openness and dual banking economies: Evidence from GCC Region

The recent wave of liberalization in Gulf Cooperation Council (GCC) countries has openedup a debate on the role of Islamic finance in the financial development of an economy.Using a comprehensive dataset of 43 Islamic and 49 conventional banks for the period2007–2015, in this paper, we investigate the impact of trade and financial openness onfinancial development in the GCC region. We find that trade and financial openness havea positive effect on the profitability of both banking systems, while the interaction termof openness is negative for the profitability of Islamic banks. Moreover, trade and financialopenness affect Islamic banks differently than conventional banks. Notably, we unveil thattrade and financial openness decrease the loan volume of Islamic banks but reduce thestability of both Islamic and conventional banks.