آیا بانکداری اسلامی یک پوشش طبیعی برای چرخه های تجاری ارائه می دهد؟ شواهد از یک سیستم بانکی دوگانه Does Islamic banking offer a natural hedge for business cycles? Evidence from a dual banking system

1 Introduction The impacts of the recent global crisis are gradually disappearing while stagnant economies are still far from revival. Acknowledging that disruptions in real economies are devastating, the academic debate about identifying bank specific characteristics that help economic recovery has re–emerged. The literature suggests certain bank characteristics, e.g. bank capital, asset quality, bank ownership etc., that explain different lending patterns within a banking system. Whilst several macroprudential measures, including procyclical capital requirements, are set to enhance bank capital and asset quality during economic downturns (Garc´ıa-Suaza et al., 2012; Repullo and Saurina, 2011; Stolz and Wedow, 2011), the impact of bank ownership still keeps its efficacy in stabilizing bank lending. It is widely known that many countries opted to nationalize their needy banks as an initial response to the recent global crisis (Beccalli and Frantz, 2016; At-Sahalia et al., 2012). Even in high– income advanced countries, state–owned banks had a clear mandate to stabilize loan market over business cycles (see World Bank, 2012, for a comprehensive overview). In line with this debate, a slim literature examines the role of Islamic banking in alleviating the effects of the recent global crisis, as Islamic banks are naturally considered to have a similar mandate (see e.g. Beck et al., 2013; Farooq and Zaheer, 2015; Hasan and Dridi, 2011; Soedarmono et al., 2017). One of the fundamental differences between Islamic and conventional banking relies on their objectives. A widespread belief suggests that Islamic banking has an ultimate objective of promoting social wealth and justice (Tlemsani and Matthews, 2002; Aribi and Arun, 2015; Mansour et al., 2015). Islamic banks also claim that their banking decisions rest on considerations beyond profit maximization. To attain certain social objectives, Islamic banking proposes certain tools. Islamic banks, for instance, praise equity financing rather than debt financing to preserve distributive justice, poverty alleviation, and social equity (see e.g. Venardos, 2012), even though the expected returns from equity financing is lower than alternative financing methods (Kuran, 1995). Although the designation of Islamic banking prioritizes social objectives, empirical evidence on the success of Islamic banks’ fulfilling these objectives is rather scant. The lack of adequate empirical evidence motivate us to investigate whether Islamic banks mitigate the repercussions of business cycles by lending1 against the cycles.