The Use of the Z-Score Indicator to Measure Financial Soundness and Stability in Islamic Banks (The Case of Al Salam Bank Algeria during the Period 2015–2024)
DOI:
https://doi.org/10.37075/FABA.2026.1.10Keywords:
Financial stability, Z-Score indicator, Islamic banksAbstract
Purpose: This study aimed to measure the level of financial stability and soundness in Islamic banks through the application of the Z-Score indicator, using Al Salam Bank Algeria as a case study over the period (2015–2024).
Design/Methodology/Approach: The research adopted a descriptive-analytical approach, drawing on financial data extracted from the bank’s annual financial statements. The Z-Score model was adapted to align with the operational specificities of Islamic banks, particularly with regard to investment accounts and profit-sharing mechanisms.
Findings: The findings indicate that the Z-Score calculated on the basis of funds belonging to Profit Sharing Investment Account holders (ISLB(Z)PSIA) reached 4.4861, while the financial stability index calculated for shareholders’ equity accounts (ISLB (Z) share, inves) recorded a value of 3.3955. These relatively high values reflect Al Salam Bank’s strong level of financial stability and the low probability of distress throughout the study period. The results further confirm the effectiveness of the Z-Score as a quantitative instrument for assessing financial stability in Islamic banks, provided that due consideration is given to their operational specificities.
Practical Implications: The proposed framework offers regulators and risk managers a more nuanced and precise method to assess financial stability in islamic banks. By taking into account the unique structure of their liabilities and governance practices, it provides a tool that supports more effective macroprudential oversight and strengthens internal risk management processes, thereby helping banks better withstand financial shocks.
Originality/Value: This study makes a significant contribution to the literature on Islamic banking by developing and empirically testing a modified Z-Score model that reflects Shariah compliant liability structures. By applying this model to emerging Islamic banking over a ten-year period, the research not only improves the methodology for assessing stability but also offers practical insights that can inform regulatory policies and supervisory practices.
Paper Type: Research Paper.
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