Financial Stability in Dual Banking Systems: A Theoretical Comparison between Conventional and Islamic Banks

Abstract

The coexistence of conventional and Islamic banking systems is a defining feature of many economies today, particularly in countries with dual financial systems. This duality raises major questions about its implications for overall financial stability. This article provides a theoretical comparative analysis of the two banking models, highlighting their conceptual foundations, intermediation mechanisms, risk management approaches, and their potential effects on financial stability. Through a structured comparison based on several key analytical dimensions, the study demonstrates that while Islamic finance possesses intrinsic stabilizing mechanisms, the coexistence of the two systems can also generate specific risks related to their interaction. The article thus contributes to the literature on financial stability in a dual banking context.