Deposit insurance and bank risk-taking: the moderating role of Islamic banking in the MENA region

Abstract

This study investigates the impact of deposit insurance on bank risk-taking and examines how Islamic banking architectures moderate this relationship in the MENA region's dual banking system. We apply panel quantile regressions to an unbalanced dataset of 136 commercial banks across 9 MENA countries from 2011 to 2023. The empirical framework uses four distinct risk dimensions: SDROA, POR, a normalized Z-score and ROA. Deposit insurance significantly reduces bank risk-taking, demonstrating that stabilization benefits dominate classical moral hazard in fragile regimes. This effect is highly asymmetric and concentrates heavily in high-risk tails. Through unique governance and contractual constraints, Islamic banking operations strengthen asset volatility reduction but weaken portfolio asset-shifting trends. Regulators should implement differentiated deposit insurance schemes tailored specifically to the unique risk-sharing properties of Islamic contracts. Overhauling and strengthening Sharia governance frameworks provides a critical mechanism to optimize overall macro-financial stability. This is the first empirical work to model the structural interaction between deposit insurance safety nets and Islamic corporate frameworks across an entire risk distribution using a quantile approach.