Legal rules, information transparency and Islamic bank capital decisions

Bitar, Mohammad; Benlemlih, Mohammed; Erragragui, Elias; Peillex, Jonathan

Abstract

To what extent does the formal institutional environment influence Islamic bank capital decisions? We answer this question by assessing the effect of the legal rule index on a sample of 100 Islamic banks in 28 countries from 1999 to 2013. Our econometric analyses show that legal rule index positively and significantly influences capital ratios. The results can be explained by the idea that effective legal rules incentivize Islamic banks to hold higher capital ratios to signal better monitoring to depositors and regulators. In addition, we find that this positive association can be enhanced through strong information transparency channels, democratic and stable political institutions. These results provide insight into how a formal institutional environment can shape Islamic bank capital ratios. It further suggests that the formal institutional environment serves as a constraint on policymakers, as any given capital guideline may function very differently depending on the complexity of the formal institutional environment.

Citation

Bitar, M., Benlemlih, M., Erragragui, E., & Peillex, J. (2021). Legal rules, information transparency and Islamic bank capital decisions. Applied Economics, 53(53), 6184-6203. https://doi.org/10.1080/00036846.2021.1937497

• Journal Article Type: Article
• Acceptance Date: May 28, 2021
• Online Publication Date: Jul 11, 2021
• Publication Date: Jan 1, 2021
• Deposit Date: Jul 15, 2021
• Publicly Available Date: Jul 2, 2022
• Journal: Applied Economics
• Print ISSN: 0003-6846
• Electronic ISSN: 1466-4283
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Volume: 53
• Issue: 53
• Pages: 6184-6203
• DOI: https://doi.org/10.1080/00036846.2021.1937497
• Keywords: Islamic banks; capital; legal rules; media; journalists jailed; democracy
• Public URL: https://nottingham-repository.worktribe.com/output/5786301
• Publisher URL: https://www.tandfonline.com/doi/abs/10.1080/00036846.2021.1937497
• Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis in Applied Economics on 11.7.2021, available online: http://www.tandfonline.com/10.1080/00036846.2021.1937497