Creditor rights and bank capital decisions: Conventional vs. Islamic banking

Bitar, Mohammad; Tarazi, Amine

Abstract

© 2018 Elsevier B.V. Using a sample of banks operating in 24 countries, we provide robust evidence that stronger creditor rights are associated with higher capital adequacy ratios for conventional banks but not for Islamic banks. Such results suggest that, under stronger creditor protection, only the managers of conventional banks increase equity, presumably as a means of signalling better monitoring efforts and of avoiding loss of control. A possible reason for the finding that Islamic banks do not generally increase equity is that, under the profit loss sharing (PLS) principle, depositors share profits and losses with the bank. The role of creditor protection is hence irrelevant in an Islamic banking context. However, we show that in predominantly non-Muslim countries with less competitive markets, Islamic banks show a similar association between creditor rights and capital ratios as conventional banks.

Citation

Bitar, M., & Tarazi, A. (2019). Creditor rights and bank capital decisions: Conventional vs. Islamic banking. Journal of Corporate Finance, 55, 69-104. https://doi.org/10.1016/j.jcorpfin.2018.11.007

• Journal Article Type: Article
• Acceptance Date: Nov 30, 2018
• Online Publication Date: Dec 13, 2018
• Publication Date: 2019-04
• Deposit Date: Oct 9, 2019
• Publicly Available Date: Jun 14, 2020
• Journal: Journal of Corporate Finance
• Print ISSN: 0929-1199
• Electronic ISSN: 0929-1199
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 55
• Pages: 69-104
• DOI: https://doi.org/10.1016/j.jcorpfin.2018.11.007
• Keywords: Creditor rights; market power; religion; bank capital ratios; Islamic banks † Corresponding author
• Public URL: https://nottingham-repository.worktribe.com/output/2788429
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0929119918301251
• Contract Date: Oct 9, 2019