CAPITAL REGULATION AND ISLAMIC BANKING PERFORMANCE: A PANEL EVIDENCE
Keywords:
Capital regulation, Islamic banks, Z-score, Return on Assets, Lending growth
Abstract
This paper empirically assesses the relation between bank performance and capital regulation for Islamic banks from 13 countries and evaluates whether the relation varies with bank size, capital, and liquidity. We find small Islamic banks to be less stable and less profitable; they also cut lending growth as capital regulation becomes more stringent. The stability and lending growth of big Islamic banks are, however, directly related to capital regulation. Further, capital regulation adversely affects the profitability of Islamic banks with low liquidity and high capital holdings. While capital regulation is needed, it should not be adopted in a blanket manner for all Islamic banks.
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References
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Windmeijer, F. (2005). A Finite Sample Correction for the Variance of Linear Coefficient Two-Step GMM Estimators. Journal of Econometrics, 126, 25-51.
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Alam, N. (2014). Regulations and Bank Risk Taking in Dual Banking Countries. Journal of Banking Regulation, 15, 105-116.
Anginer, D., Demirguc-Kunt, A., and Zhu, M. (2014). How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis. Journal of Banking and Finance, 48, 312-321.
Arellano, M., and Bover, O. (1995). Another Look at the Instrumental Variable Estimation of Error-Components Models. Journal of Econometrics, 68, 29-51.
Athenasoglou, P.P., Brissimis, N.S., and Delis, M.D. (2008). Bank-Specific, Industry-Specific and Macroeconomic Determinants of Bank Stability. Journal of International Financial Markets, Institutions & Money, 18, 121-136.
Barth, J.R., Caprio, G., and Levine, R. (2006). Rethinking Bank Regulation: Till Angels
Govern. Cambridge: Cambridge University Press.
Barth, J. R. Jr., Caprio, G., and Levine, R. (2013). Bank Regulation and Supervision in 180 Countries from 1999 to 2011. Journal of Financial Economic Policy, 5, 111-219.
Beccalli, E., Anolli, M., and Borello, G. (2015). Are European Banks Too Big? Evidence on Economies of Scale. Journal of Banking and Finance, 58, 232-246.
Bermpei, T., Kalyvas, A., and Nguyen, T.C. (2018). Does Institutional Quality Condition the Effect of Bank Regulations and Supervision on Bank Stability? Evidence from Emerging and Developing Economies. International Review of Financial Analysis, 59, 255-275.
Blundell, R., and Bond, R. (1998). Initial Conditions and Moment Restrictions in Dynamic Panel Data Models. Journal of Econometrics, 87, 115-143.
Boudrigua, A., Taktak, N.B., and Jellouli, S. (2009). Banking Supervision and Non-Performing Loans: A Cross-Country Analysis. Journal of Financial Economic Policy, 1, 286-318.
Brambor, T., Clark, W.R., and Golder, M. (2006). Understanding Interaction Models: Improving Empirical Analyses. Political Analysis, 14, 63-82.
Cihak, M., and Hesse, H. (2010). Islamic Banks and Financial Stability: An Empirical Analysis. Journal of Financial Services Research, 38, 95-113.
Cubillas, E., and Gonzalez, F., 2014. Financial Liberalization and Risk-Taking: International Evidence. Journal of Financial Stability, 11, 32-48.
De Nicolo, G. (2015). Revisiting the Impact of Bank Capital Requirements on Lending and Real Activity. IMF and CESifo.
Deli, Y.D., and Hasan, I. (2017). Real Effects of Bank Capital Regulations: Global Evidence. Journal of Banking and Finance, 82, 217-228.
Delis, M.D., Tran, K.C., and Tsionas, E.G. (2012). Quantifying and Explaining Parameter Heterogeneity in the Capital Regulation – Bank Risk Nexus. Journal of Financial Stability, 8, 57-68.
Doumpos, M., Gaganis, C., and Pasiouras, F. (2015). Central Bank Independence, Financial Supervision Structure and Bank Soundness: An Empirical Analysis Around the Crisis. Journal of Banking and Finance, 61, S69-S83.
Fratzscher, M., Konig, P.J., and Lambert, C. (2016). Credit Provisions and Banking Stability After the Great Financial Crisis: The Role of Bank Regulation and the Quality of Governance. Journal of International Money and Finance, 66, 113-135.
Garcia-Herrero, A., Gavila, S., and Santabarbara, D., 2009. What Explains the Low Profitability of Chinese Banks? Journal of Banking and Finance, 33, 2080-2092.
Ibrahim, M.H. (2016). Business Cycle and Bank Lending Procyclicality in a Dual Banking System. Economic Modelling, 55, 127-134.
Ibrahim, M.H., and Rizvi, S.A.R. (2018). Bank Lending, Deposits and Risk-Taking in Times Of Crisis: A Panel Analysis of Islamic and Conventional Banks. Emerging Markets Review, 35, 31-47.
Ibrahim, M.H., and Rizvi, S.A.R. (2017). Do We Need Bigger Islamic Banks? An Assessment of Bank Stability. Journal of Multinational Finance Management, 40, 77-91.
International Monetary Fund. (2017). Multi-Country Report: Ensuring Financial Stability in Countries with Islamic Banking. IMF Country Report No. 17/145.
Moutsianas, K.A., and Kosmidou, K. (2016). Banking Earnings Volatility in the UK: Does Size Matter? A Comparison Between Commercial and Islamic Banks. Research in International Business and Finance, 38, 137-150.
Naceur, S. B., and Kandil, M. (2009). The Impact of Capital Requirements on Banks’ Cost Of Intermediation and Performance: The Case of Egypt. Journal of Economics and Business, 61, 70-89.
Naceur, S.M., and Omran, M. (2011). The Effects of Bank Regulations, Competition, and Financial Reforms on Banks’ Performance. Emerging Markets Review, 12, 1-20.
Osei-Assibey, R., and Asenso, J.K. (2015). Regulatory Capital and Its Effect on Credit Growth, Non-Performing Loans and Bank Efficiency: Evidence from Ghana. Journal of Financial Economic Policy, 7, 401-420.
Tan, Y. (2016). The Impacts of Risk and Competition on Bank Profitability in China. Journal of International Financial Markets, Institutions & Money, 40, 85-110.
Tan, Y., and Floros, C. (2013). Risk, Capital and Efficiency in Chinese Banking. Journal of International Financial Markets Institutions and Money, 26, 378-393.
Triki, T., Kouki, I., Dhaou, M.B., and Calice, P. (2017). Bank Regulation and Efficiency: What Works for Africa? Research in International Business and Finance, 39, 183-205.
Windmeijer, F. (2005). A Finite Sample Correction for the Variance of Linear Coefficient Two-Step GMM Estimators. Journal of Econometrics, 126, 25-51.
Zins, A., and Weill, L. (2017). Islamic Banking and Risk: The Impact of Basel II. Economic Modelling, 64, 626-637.
Published
2019-04-30
How to Cite
Ibrahim, M. (2019). CAPITAL REGULATION AND ISLAMIC BANKING PERFORMANCE: A PANEL EVIDENCE. Buletin Ekonomi Moneter Dan Perbankan, 22(1), 47 - 68. https://doi.org/10.21098/bemp.v22i1.1029
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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
