The Impact of Net Stable Funding Ratio (NSFR) Regulations of Basel-III on Financial Profitability and Stability: A Case of Asian Islamic Banks

This paper examines the effectiveness of Basel III framework by linking the Net Stable Funding Ratio
(NSFR) with profitability and stability of Asian Islamic Banks. The formula for measuring NSFR was
introduced in the Basel III accord. Data from 89 Islamic banks for the period of (2011-17), from 20
countries in the (southern, eastern and western) Asian regions where Islamic Banking System is applicable
was collected. Two-step Generalized Method of Moments (GMM) model estimator is used in order to
handle simultaneity bias and endogeniety problem. The result showed that the Islamic banks of Asian
regions are stable. All the results validate Basel III NSFR as a significant safeguard regulatory step for
stability and insignificant for profitability of the banks. It is proposed that Banking supervision committee
must consider the different nature of Islamic banks and formulate a different criteria which will not affect
their profitability as Islamic banks has one more layer of supervision in the form of Shariah Advisory board
other than Central bank of any country.