The risk-capital-efficiency trilogy: A comparative study between Islamic and conventional banks. Issue 12 (5th December 2016)

• Record Type: Journal Article
• Authors: Louati, Salma; Louhichi, Awatef; Boujelbene, Younes
• Is Part Of: Managerial finance. Volume 42:Issue 12(2016)
• Page Start: 1226
• Page End: 1252
• Publication Date: 2016-12-05
• Subjects: NPL -- Efficiency -- z-score -- Islamic bank -- Capital; Corporations -- Finance -- Periodicals; Business enterprises -- Finance -- Periodicals; 658.1505
• DOI: 10.1108/MF-01-2016-0009
• Languages: English
• ISSNs: 0307-4358

Abstract

Abstract : Purpose: Based on a matched sample of 34 Islamic banks and 89 conventional ones, the purpose of this paper is to analyze and compare the risk-capital-efficiency interconnection. Design/methodology/approach: Based on the triple square model (3SLS), two major risk measures have been accounted for, namely, the ratio of non-performing loans to total loans (credit risk) and the z -score indicator (risk insolvency). In addition, certain bank-specific factors as well as macroeconomic ones have also been considered in the model. Findings: The reached results appear to reveal that the best capitalized Western banks turn out to be more engaged in an excessive risk-taking behavior, resulting in increased toxic-loan ratios and, simultaneously, a rather shaken stability. Concerning Islamic banks, cost efficiency has proven to have a negative and significant effect on NPLs. However, the capital, technical efficiency, competitiveness and macroeconomic factors turn out to have a significant and positive effect on Islamic banks' insolvency risk, thus helping promote these banks' stability. Originality/value: In addition to the enrichment of literature regarding dual-banking systems, the authors hope the present work would provide a modest contribution to the regulators belonging to the MENA region and Asia with useful results. In particular, the authors recommend developing some management and monitoring tools whereby the risk-taking behavior of highly capitalized conventional banks could be moderated. As a matter of fact, special attention should be paid to the agency problems prevalent within Islamic financial institutions, particularly the best capitalized ones.