Does fossil oil price matter? Market performance of banks in the dual banking system and policy implications

Mohammed Sharaf Shaiban^1*di li²Akram Shavkatovich hasanov¹Mirzet Seho¹

• ¹Monash University Malaysia, Subang Jaya, Malaysia
• ²City University of Macau, Macao, Macao, SAR China

This study examines the impact of oil price shocks on the stock performance of 73 listed banks-41 conventional and 32 Islamic-across dual banking systems in net oil-exporting and importing countries. Employing panel fixed-effects and two-stage least squares (2SLS) IV regressions, we address both endogeneity and unobserved heterogeneity. The results show that oil price fluctuations significantly influence bank stock returns, with a stronger negative effect during oil price declines, particularly those driven by demand-side shocks. Islamic banks are more sensitive to these fluctuations than their conventional counterparts, reflecting greater exposure to oil-dependent macroeconomic environments. Robustness checks confirm nonlinear and asymmetric effects: bank stock returns respond more adversely to falling oil prices than to increases. These responses differ systematically across bank types and national oil dependency levels. Our findings underscore the importance of accounting for oil price risk in bank valuation and performance forecasting. For financial managers and investors, the results highlight the need to integrate oil-related risk factors into portfolio management, stress testing, and pricing models. For regulators and policymakers, the evidence supports the adoption of macroprudential tools such as countercyclical capital buffers and sectorspecific supervisory frameworks to strengthen banking system resilience, particularly for Islamic banks operating in oil-dependent economies. Additionally, disclosure standards should be enhanced to improve transparency around oil price exposure, enabling better-informed decision-making across all stakeholders.-dependent economies.