The determinants of Islamic bank capital decisions

Bitar, Mohammad; Hassan, M. Kabir; Hippler, William J.

Abstract

We report new evidence on the bank and institutional determinants of Islamic bank capital ratios in 28 countries between 1999 and 2013. Overall, we find that smaller, more profitable, and highly liquid Islamic banks are more highly capitalized. Additionally, improvements in the economic and financial environments and market discipline within a country correspond with higher Islamic bank capitalization. The results shed light on the impact that Sharia'a law restrictions have on Islamic banking capitalization. Our findings are most robust to banks that choose to hold capital well in excess of that required by regulators, consistent with traditional capital structure theory. Our results highlight the role that stable economic and political systems play in improving bank capitalization and reducing financial sector risk. By reducing political instability and corruption, improving legal systems, and encouraging access to capital markets, policymakers may incentivize managers to make financing decisions that increase the capitalization of the Islamic banking industry in developing countries.

Citation

Bitar, M., Hassan, M. K., & Hippler, W. J. (2017). The determinants of Islamic bank capital decisions. Emerging Markets Review, 35, 48-68. https://doi.org/10.1016/j.ememar.2017.12.002

• Journal Article Type: Article
• Acceptance Date: Dec 16, 2017
• Online Publication Date: Dec 21, 2017
• Publication Date: Dec 21, 2017
• Deposit Date: Oct 9, 2019
• Publicly Available Date: Dec 13, 2019
• Print ISSN: 1566-0141
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 35
• Pages: 48-68
• DOI: https://doi.org/10.1016/j.ememar.2017.12.002
• Keywords: bank capitalization; Islamic banking; institutional environment; political distress; market discipline; democracy 2
• Public URL: https://nottingham-repository.worktribe.com/output/2792368
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1566014116300930