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

Bitar, Mohammad; Tarazi, Amine

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


Authors

Amine Tarazi



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 Mar 29, 2024
Journal Journal of Corporate Finance
Print 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

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