Vulnerability and profitability of MENA banking system: Islamic versus commercial banks

2016 ◽  
Vol 9 (4) ◽  
pp. 454-473 ◽  
Author(s):  
Ahmad Y. Khasawneh
Keyword(s):  
Panel Data ◽  
Financial Crises ◽  
Commercial Banks ◽  
Stochastic Frontier ◽  
Balance Sheet ◽  
Banking System ◽  
Islamic Banks ◽  
African Countries ◽  
Content Type ◽  
Analytical Approaches

Purpose This paper aims to compare Islamic and commercial banks in the region of Middle East and North Africa (MENA) in terms of profitability and stability. Design/methodology/approach The study combines both the descriptive and analytical approaches. It considers panel data sets and adopts panel data econometric techniques. Findings The determinants of banks profitability and stability are different according to bank’s type. The results show that Islamic banks are more profitable than commercial banks, while on the other hand, commercial banks are more stable than Islamic banks. It is also concluded that banks profitability and stability are determined through some bank’s characteristics variables and macroeconomic variables in addition to the financial crises. MENA commercial and Islamic banking was affected by the financial crises in terms of profitability and stability. Additionally, larger banks are more stable than smaller banks, and off-balance sheet activities increase banks’ vulnerability for both commercial and Islamic MENA banks. Research limitations/implications The most prominent limitation is the lack of data, as we had to exclude some variables because of missing observations. As a result, the authors could not use data envelopment approach and stochastic frontier approach to evaluate banks efficiency in MENA countries rather than the financial ratios. Practical implications Commercial banks need to enhance their capitalization to improve their profitability. Additionally, Islamic banks need to improve the risk assessment and adopt some of the available risk management tools. Moreover, the banking system should take advantage of relatively higher Islamic banks profitability and use the unexploited profit opportunities through spreading into those countries with limited availability, such as the North African countries. Originality/value This study address both banks profitability and stability in an emerging region that includes banks of different types (Islamic and commercial) which are located in different counties that allows accounting for operational and institutional differences.

Empirical evaluation of structure-conduct-performance paradigm as applied to the Iranian Islamic banking system

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mahdi Ghaemi Asl ◽  
Muhammad Mahdi Rashidi ◽  
Alireza Ghorbani
Keyword(s):  
Market Structure ◽  
Market Share ◽  
Balance Sheet ◽  
Empirical Evaluation ◽  
Banking System ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Content Type ◽  
Simple Regression Model ◽  
The Impact

Purpose This paper aims to investigate the impact of market structure and market share on the performance of the Islamic banks operating in the Iranian banking system based on the structure-conduct-performance (SCP) paradigm. Design/methodology/approach The Iranian Islamic banking system’s market structure is evaluated by using the econometrics method to test the validity of the traditional SCP paradigm. For this purpose, the authors estimate a simple regression model that is consisted of several independent variables, such as the market share, bank size, real gross domestic product, liquidity and Herfindahl-Hirschman index as a proxy variable for concentration and one dependent variable, namely, the profit as a proxy for performance. The panel data includes a data sample of 22 Islamic banks operating from 2006 to 2019. Data are extracted from the balance sheet of Islamic banks and the time-series database of the Central Bank of Iran and World Bank. Findings The study’s findings indicate that both concentration and market share have a positive impact on the performance of banks in the Iranian Islamic banking system. This result is contradicted with both traditional SCP and efficient structure hypotheses; however, it confirms the existence of oligopoly or cartel in the Iranian Islamic banking system that few banks try to gain the highest share of profit and maintain their market share by colluding with each other. This result is in contradiction with other research studies about the market structure in the Iranian banking system that claimed that banks in Iran operate under monopolistic competition. In addition, it shows that the privatization of some banks in Iran does not improve and help competition in the Iranian banking system. Originality/value This paper is a pioneer empirical study analyzing the market structure, concentration and collusion based on the SCP paradigm in Iranian Islamic banking. The results of the study support the existence of collusive behavior among the Islamic bank in Iran that is not aligned with Sharia. This study clearly shows the difference between ideal Islamic banking and Islamic banking in practice in Islamic countries. This clearly indicates that only prohibiting some operations like receiving interest, gambling and bearing excessive risk is not enough. In fact, the Islamic banking system should be based on the Sharia rule in all aspects and much more modification and study have to be done to achieve an appropriate Islamic banking system. These possible modifications to overcome the issues of cartel-like market structure and collusive behavior in the Iranian Islamic banking system include making the Iranian banking system more transparent, letting foreign banks enter the Iranian banking system and minimizing the government intervention in the Iranian banking system.

Linking bank regulatory capital buffer to business cycle fluctuations

2018 ◽  
Vol 45 (3) ◽  
pp. 565-585 ◽  
Author(s):  
Kolade Sunday Adesina ◽  
John Muteba Mwamba
Keyword(s):  
Panel Data ◽  
Market Power ◽  
Commercial Banks ◽  
Basel Iii ◽  
Regulatory Capital ◽  
Revenue Diversification ◽  
African Countries ◽  
Data Set ◽  
Content Type ◽  
Cyclical Behavior

Purpose The purpose of this paper is to assist bank regulators in Africa who are currently considering the implementation of Basel III countercyclical capital buffer (CCB) requirement. Design/methodology/approach Using a panel data set of 129 commercial banks operating in 14 African countries over the period 2004–2014, this paper estimates the system generalized method of moments regression to examine the impact of business cycle on banks’ regulatory capital buffers and attempts to identify the influence of bank revenue diversification, market power and cost of funding (CF) on bank regulatory capital buffers. It further carries out some robustness analyses using a panel data set of 257 commercial banks in 23 African countries over the period 2004–2014. Findings The results show that higher regulatory capital buffers are associated with higher market power, higher revenue diversification and higher CF. Additionally, the results show significant evidence of procyclical behavior of bank capital buffers (BUFs) in the sampled countries. Practical implications The results of this study suggest that African banking systems are not exposed to contagion and systemic risks arising from countercyclical movements of BUFs to the real economy. Therefore, this study does not support the implementation of the Basel III CCB requirement in the sampled African countries. Originality/value Considering that the results of existing studies on the cyclical behavior of BUFs are inconclusive, there is value in studying the cyclical movements of bank regulatory capital buffers in a set of countries that has not been analyzed before. Toward this direction, this is the first empirical study focusing on the cyclical behavior of bank regulatory capital buffers in Africa. Besides examining the cyclical behavior of bank regulatory capital buffers, this paper further investigates the effects of bank revenue diversification, market power and CF on bank regulatory capital buffers.

Bank competition and economic growth

2017 ◽  
Vol 44 (2) ◽  
pp. 245-265 ◽  
Author(s):  
Roland Mwesigwa Banya ◽  
Nicholas Biekpe
Keyword(s):  
Economic Growth ◽  
Panel Data ◽  
Banking Sector ◽  
Banking System ◽  
Commercial Banking ◽  
Bank Competition ◽  
African Countries ◽  
Content Type ◽  
Panel Data Estimation ◽  
Marginal Costs

Purpose The degree and impact of competitiveness in the banking sector is of great importance as this has great impact on the financial system and the wider economy. A question of interest here is, does competition in the commercial banking sector boost or hamper economic growth. The purpose of this paper is to test the hypothesis that competitiveness in commercial banking is linked to economic growth. Design/methodology/approach The authors use the Boone (2008) indicator to estimate competitiveness of banking markets in ten frontier countries in Africa from 2005 to 2012. This model measures banking competitiveness by assessing the relationship between relative marginal costs and relative market share. Through a panel data model, the authors examine the effect banking sector competitiveness has on economic growth. Findings The results of Boone (2008) indicator suggest that, to a greater extent, banks in the countries studied have a competitive banking sector. The results of the panel data estimation support the hypothesis that banking sector competition impacts positively on economic growth. Practical implications The paper recommends for more policy geared towards enhancing bank competition. This is because competitive banking system will allocate resources more efficiently to improve economic growth. Originality/value To the best of the authors’ knowledge, this is the first study to test the link between bank competition and economic growth in a cross-section of Frontier African countries.

Freedom, competition and bank efficiency in Sub-Saharan Africa

2017 ◽  
Vol 59 (6) ◽  
pp. 1359-1380 ◽  
Author(s):  
Emmanuel Sarpong-Kumankoma ◽  
Joshua Abor ◽  
Anthony Q.Q. Aboagye ◽  
Mohammed Amidu
Keyword(s):  
Market Power ◽  
Cost Efficiency ◽  
Stochastic Frontier ◽  
Banking System ◽  
Sub Saharan Africa ◽  
Tobit Regression ◽  
African Countries ◽  
Bank Efficiency ◽  
Content Type ◽  
Sub Saharan

Purpose This study aims to consider the effect of financial (banking) freedom and competition on bank efficiency. Design/methodology/approach With data from 11 Sub-Saharan African countries over the period 2006-2012, the study estimates both competition (market power) and bank cost efficiency using the same stochastic frontier framework. Subsequently, Tobit models, including instrumental variable Tobit regression, are used to assess how financial freedom affects the relationship between competition and bank efficiency. Findings The results show that increase in market power (less competition) leads to greater bank cost efficiency, but the effect is weaker with higher levels of financial freedom. This is not consistent with the quiet life hypothesis. Practical implications Policymakers usually take the view that opening up banking markets to greater competition may lead to higher efficiency. However, the results have shown that allowing banks to maintain some level of market power may be necessary to ensure banking system efficiency. Originality/value This study deepens the understanding of the inconsistent relationship between competition and bank efficiency, by using the same framework to measure both competition and efficiency, and by providing new empirical evidence on how the level of financial freedom affects this relationship.

The impact of COVID-19 on Islamic banks in Bangladesh: a perspective of Marxian “circuit of merchant’s capital”

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohammad Dulal Miah ◽  
Yasushi Suzuki ◽  
S. M. Sohrab Uddin
Keyword(s):  
Financial Services ◽  
Balance Sheet ◽  
Banking System ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Working Capital ◽  
Content Type ◽  
Increased Risk ◽  
Merchant Capital ◽  
The Impact

Purpose This paper aims to assess the probable impact of COVID-19 on the Islamic banking system in Bangladesh. More specifically, it attempts to test the hypothesis that Islamic banks are exposed to increased risk because of their role as a provider of “merchant capital” including financing for trade, commerce and working capital, which are believed to be severely disrupted by the COVID-19. Design/methodology/approach The paper draws upon the Marxian tradition on the identification of the circuit of “merchant capital” separated from the circuit of “interest-bearing capital.” Moreover, the research adopts the balance sheet approach to trace the sectoral distribution of investment as well as sources of income of Islamic banks. Findings The research supports the hypothesis that the investment pattern of Islamic banks is skewed toward the trade and merchant’s financing. More than two-third of Islamic banks’ investment, and income thereof, is concentrated on working capital and trade finance. As these sectors are largely vulnerable to the economic shock resulting from COVID-19, Islamic banks in Bangladesh are likely to be affected through this channel. Research limitations/implications The research focuses only on Islamic banks in Bangladesh. Further study can assess the impact of COVID-19 on conventional and Islamic banks in other countries to find similarities and differences with the findings of the current research. Practical implications The finding of this research will be useful for bank managers, policymakers and users of financial services. In particular, this study provides important information useful for regulators in devising appropriate policies which aim to mitigate the adverse impact of COVID-19. Originality/value To the best of the authors’ knowledge, this is the first study that attempts to examine the impact of COVID-19 on Islamic banking system in Bangladesh, a country where Islamic banks occupy one-third of the total banking system’s assets.

Shadow banking from China's perspective: an empirical analysis of bank-issued wealth management products

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Syed Mehmood Raza Shah ◽  
Qiang Fu ◽  
Ghulam Abbas ◽  
Muhammad Usman Arshad
Keyword(s):  
Commercial Banks ◽  
Fixed Effects ◽  
Banking Sector ◽  
Balance Sheet ◽  
Estimation Method ◽  
Least Square ◽  
Shadow Banking ◽  
Content Type ◽  
Wealth Management ◽  
Chinese Banks

PurposeWealth Management Products (WMPs) are the largest and most crucial component of China's Shadow banking, which are off the balance sheet and considered as a substitute for deposits. Commercial banks in China are involved in the issuance of WMPs mainly to; evade the regulatory restrictions, move non-performing loans away from the balance sheet, chase the profits and take advantage of yield spread (the difference between WMPs yield and deposit rate).Design/methodology/approachIn this study, the authors investigate what bank related characteristics and needs; influenced and prompted the issuance of WMPs. By using a quarterly panel data from 2010 to 2019, this study performed the fixed effects approach favored by the Hausman specification test, and a feasible generalized least square (FGLS) estimation method is employed to deal with any issues of heteroscedasticity and auto-correlation.FindingsThis study found that there is a positive and significant association between the non-performing loan ratio and the issuance of WMPs. Moreover, profitability and spread were found to play an essential role in the issuance of WMPs. The findings of this study suggest that WMPs are issued for multi-purpose, and off the balance sheet status of these products makes them very lucrative for regulated Chinese commercial banks.Research limitations/implicationsNon-guaranteed WMPs are considered as an item of shadow banking in China, as banks do not consolidate this type of WMPs into their balance sheet; due to that reason, there is no individual bank data available for the amount of WMPs. The authors use the number of WMPs issued by banks as a proxy for the bank's exposure to the WMPs business.Practical implicationsFrom a regulatory perspective, this study helps regulators to understand the risk associated with the issuance of WMPs; by providing empirical evidence that Chinese banks issue WMPs to hide the actual risk of non-performing loans, and this practice could mislead the regulators to evaluate the bank credit risk and loan quality. This study also identifies that Chinese banks issue WMPs for multi-purpose; this can help potential investors to understand the dynamics of WMPs issuance.Originality/valueThis research is innovative in its orientation because it is designed to investigate the less explored wealth management products (WMPs) issued by Chinese banks. This study's content includes not only innovation but also contributes to the existing literature on the shadow banking sector in terms of regulatory arbitrage. Moreover, the inclusion of FGLS estimation models, ten years of quarterly data, and the top 30 Chinese banks (covers 70% of the total Chinese commercial banking system's assets) make this research more comprehensive and significant.

Technical efficiency and its determinants in the Indian textile garments industry

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Abdulla ◽  
Shiv Kumar
Keyword(s):  
Panel Data ◽  
Technical Efficiency ◽  
Textile Industry ◽  
Small And Medium Enterprises ◽  
Stochastic Frontier ◽  
Efficiency Score ◽  
Value Chains ◽  
Small Scale ◽  
Content Type ◽  
Medium Enterprises

Purpose This paper aims to examine technical efficiency and its determinants in Indian textile garments industry in post-agreement on textiles and clothing regime and evaluate the technical efficiency among micro, small and medium enterprises (MSMEs) firms. Design/methodology/approach This study uses unbalanced panel data for the period 2005–2010 to 2015–2016. The stochastic frontier function is used to estimate technical efficiency and its determinants. Findings The results show that the overall ecosystem of textile garments’ value chains could be improved to enhance the technical efficiency thereof. The result also reveals that small-scale firms have the highest technical efficiency scores, and medium-scale firms have the least technical efficiency score among all the categories of MSMEs. Research limitations/implications The textile garments industry needs to define its innovation strategies, as these strategies lead to different results that can be achieved only through the management of resources dedicated to the generation and implementation of innovations. Practical implications This study has shown that to offset India’s cost disadvantage in the international markets, there is a need to develop an ecosystem of textile manufacturing and value chains, eliminate the inverted duty structure (where inputs are taxed at a higher rate than the final product) and switch over from shuttle looms toward shuttle-less looms. This would unleash the potential of textile and garments industry and make it globally competitive and technically efficient. Further, there will be an alignment with the ease of doing business with an appropriate mix of policy, technology, institution, infrastructure, information and services. Originality/value Using frontier production function takes stochastic context into account for the dynamic character of technical efficiency and its components. Most of the past studies have assessed technical efficiency at the aggregate level using three-digit National Industrial Classification (NIC) or four-digit NIC code. An analysis at higher levels of aggregation masks the variation in technical efficiency. This study used five-digit NIC data to measure the firm-specific technical efficiency of the textile industry. According to the authors’ knowledge, this study is the first of its kind in the Indian textile industry using stochastic frontier approach and panel data. Further, it also looks at the contribution of different determinants in technical efficiency to the firms.

scholarly journals Factors Influencing Non-Performing Loans in Commercial Banks: The Case of Banks in Selangor

2017 ◽  
Vol 12 (2) ◽  
pp. 246
Author(s):  
Uma Murthy ◽  
Naail Mohammed Kamil ◽  
Paul Anthony Mariadas ◽  
Dilashenyi Devi
Keyword(s):  
Interest Rate ◽  
Commercial Banks ◽  
Quantitative Research ◽  
Balance Sheet ◽  
Banking System ◽  
Sampling Technique ◽  
Research Approach ◽  
Probabilistic Sampling ◽  
Factors Influencing ◽  
Descriptive Approach

Non-performing loans (NPL) is a worldwide issue that affects financial markets stability in general and banking industry viability in particular. The net non-performing loan (NPL) ratio in the banking system since the Asian financial crisis has gradually been in decline from 13.6% in December 1998 to 2.8% in May 2008. Government intervention to non-performing loan recovery strategies have contributed significantly in the decline. The Malaysian government and banks have succeeded in removing the non-performing loans (NPL) from banks Balance Sheet. This study examines the factors influencing non-performing loans in commercial banks in Selangor. A quantitative research approach is employed in this research following the positivist assumption with a realist ontology and objectivist epistemology. Data was collected using a probabilistic sampling method, particularly a stratified random sampling technique. The adapted survey questionnaire employed in this study and distributed 150 questionnaires and successfully received 130 questionnaires. Overall, the researcher has discussed about the findings of the analysis that was conucted using the SPSS software. Descriptive approach, correlation and multiple regression analysiss had been shown during the analysis. The descriptive approach displayed direct  results while  the correlation displayed the relationship between the dependent variable (non-performing loan) and the independent variables (standard of living, consumer income, economy of the country, bank interest rate). In this research, found three factors that influencing non-performing loan in Malaysia which are consumers’ income, the economy of the country and bank interest rate. The bank will found that the bank interest rate affect the rate of non-performing loan increase. For the future researchers, this research will benefit them as well. If they are doing their researches which are related to this topic, they can gather everything they want easily. Besides that, it will benefit the researcher who is going to do this research study in Malaysia. This is because the information in Malaysia is limited.

Credit risk in dual banking systems: does competition matter? Empirical evidence

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohsin Ali ◽  
Mudeer Ahmed Khattak ◽  
Nafis Alam
Keyword(s):  
Credit Risk ◽  
Banking System ◽  
Islamic Banks ◽  
Content Type ◽  
Panel Data Estimation ◽  
System A ◽  
Size Groups ◽  
Conventional Banks ◽  
Fierce Competition ◽  
Data Estimation

PurposeThe study of credit risk has been of the utmost importance when it comes to measuring the soundness and stability of the banking system. Due to the growing importance of Islamic banking system, a fierce competition between Islamic and conventional banks have started to emerge which in turn is impacting credit riskiness of both banking system.Design/methodology/approachUsing the system GMM technique on 283 conventional banks and 60 Islamic banks for the period of 2006–2017, this paper explores the important impact of size and competition on the credit risk in 15 dual banking economies.FindingsThe authors found that as bank competition increases credit risk seems to be reduced. On the size effect, the authors found that big Islamic banks are less risky than big conventional banks whereas small Islamic banks are riskier than small conventional banks. The results are robust for different panel data estimation models and sub-samples of different size groups. The findings of this paper provide important insights into the competition-credit risk nexus in the dual banking system.Originality/valueThe paper is specifically focused on credit risk in dual banking environment and tries to fill the gap in the literature by studying (1) do the Islamic and conventional banks exhibit a different level of credit risk; (2) does competition in the banking system impact the credit risk of Islamic and conventional banks and finally (3) do the big and small banks exhibit similar levels of credit risk.

The relationships between time deposit rates, real rates, inflation and risk premium

2020 ◽  
Vol 11 (5) ◽  
pp. 1033-1053
Author(s):  
Siew-Peng Lee ◽  
Mansor Isa ◽  
Noor Azryani Auzairy
Keyword(s):  
Interest Rates ◽  
Risk Premium ◽  
Banking System ◽  
Islamic Banks ◽  
Content Type ◽  
The Real ◽  
Explanatory Variables ◽  
Time Deposit ◽  
Causality Tests ◽  
Conventional And Islamic Banks

Purpose The purpose of this paper is to investigate the influence of the real interest rates, inflation and risk premium on the time deposit rates of banks in the dual banking system in Malaysia. Design/methodology/approach The data consists of 1-, 6- and 12-month average time deposit rates of conventional and Islamic banks over the period of January 2000 to June 2017. The cointegration methodologies are used to explore links between the time deposit rates, real rates, inflation and risk premium. The causality tests to test causality linkages between pairs of variables are also applied. The generalised forecast error variance decomposition based on the error correction model is conducted to analyse the impact of variables variation on the deposit rates. Findings The results show the presence of two cointegration vectors in the deposit rates, real rates, inflation and risk premium, for both conventional and Islamic bank rates. Causality tests reveal that deposit rates are caused by inflation and risk premium in a one-way causality. The results of variance decomposition highlight the importance of inflation and risk premium in explaining the variations in the bank deposit rates. For the conventional bank, inflation shocks play the most important role in explaining the movements of the deposit rates. In Islamic banks, the major determinant’s largest influence is the risk premium. Between the two bank rates, Islamic bank rates receive more influence from the explanatory variables in the long-run compared to conventional bank rates. The real rates have no noticeable effect on the variance of time deposit rates for both banks. Originality/value This study presents new evidence on the relationship between time deposit rates and the three explanatory variables, which are the real interest rates, inflation and risk premium, for both conventional and Islamic banks in Malaysia. The dual banking system allows exploring the similarities and differences between conventional and Islamic banks in Malaysia in terms of the linkages between the variables.

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