Has the risk index of Islamic banks and conventional banks in GCC countries changed in response to the 2008 economic crisis?

Authors

  • Talla M Aldeehani Kuwait University College of Business Administration

DOI:

https://doi.org/10.18533/jefs.v4i04.244

Keywords:

Banking, Capital Structure, Financial Crisis, Islamic Banking, Financial Risk.

Abstract

In this empirical study, we investigate the effect of the 2008 economic crisis on the level of risks Islamic banks (IB) and conventional banks (CB) are facing and the determinants of their risk indices. We cover 20 banks operating in the Gulf Cooperation Council (GCC) countries during 2001-2014. The results indicate that while the state of the economy had no effect on the risk index (RI) of banks, the type of bank did have an effect. The results suggest that the RI of IB was significantly lower than that of CB before and after the crisis indicating higher risks for IB. While the RI of CB is explained by solvency and liquidity variables, the RI of IB is explained by liquidity and profitability variables. Discussions, interpretations of research results and implications are provided.

References

Ahmad, R., Ariff, M. and Skully, M.J. (2015). The determinants of bank capital ratios in a developing economy. Asia-Pacific Financial Markets, 15 (3) 255–272.

Akhtar, M. F., Ali, Kh. and Sadaqat, Sh. (2011). Liquidity risk management: a comparative study between conventional and Islamic banks in Pakistan. Interdisciplinary Journal of Research in Business, 1(1), 35-44.

Al-Deehani, T., EL-Sadi, H. and Al-Deehani, M. (2015). The performance of Islamic banks and conventional banks before and during the economic downturn. Investment Management and Financial Innovation, 12 (2), 238-250.

Aldeehani, T., Karim, R. A. and Murinde, V. (1999). The capital structure of Islamic banks under the contractual obligation of profit sharing. International Journal of Theoretical and Applied Finance, 2 (3), 243-283. http://dx.doi.org/10.1142/S0219024999000157

Alkulaib, Y., Almudhaf, F. and Al-Jassar, S. (2013). The banking industry during an extended financial crisis: an empirical assessment of Kuwait banks, Academy of Banking Studies Journal, 12 (1), 61-73.

Archer, S., Karim, R. A. and Aldeehani, T. (1998). Financial contracting, governance structure and the accounting regulation of Islamic banks: an analysis in terms of agency theory and transaction cost economics. Journal of Management and Governance, 2, 149-170. http://dx.doi.org/10.1023/A:1009985419353

Ariffin Noraini, A., Archer, S. and Abdel Karim, R. A. (2009) Risk in Islamic banks: evidence from empirical research. Journal of Banking Regulations, 10 (2), 153-163. http://dx.doi.org/10.1057/jbr.2008.27

Blundell-Wignall, A., Atkinson, P. and Lee, S. H. (2008). The current financial crisis: causes and policy issues. Financial Market, OECD: ISSN 1995-2864.

Boumediene, A. (2011). Is credit risk really higher in Islamic banks? The Journal of Credit Risk, 7 (3), 97-129. http://dx.doi.org/10.21314/JCR.2011.128

Eisenbeis, R. A. and Kwast, M. L. (1991). Are real estate depositories variables? Evidence from commercial banks. Journal of financial services research, 5, 5-24. http://dx.doi.org/10.1007/BF00127081

Goodhart, C.A. (2008). The regulatory response to the financial crisis. Working paper. http://dx.doi.org/10.1016/j.jfs.2008.09.005

Hasan, M. and Dridi, J. (2011). The effect of the global crisis on Islamic and conventional banks: a comparative study. Journal of International Commerce, Economics and Policy, 2 (2), 163-200. http://dx.doi.org/10.1142/S1793993311000270

Hussein, K. (2010). Bank-level stability factors and consumer confidence – a comparative study of Islamic and conventional banks' product mix. Journal of Financial Services Marketing, 15 (3), 259-270. http://dx.doi.org/10.1057/fsm.2010.21

IMF (2015). Monetary operations and Islamic banking in the GCC: Challenges and options. Working paper: WP/15/234.

Kantawala, A. S. (2004). Apropos the soundness of public sector banks. Finance India, XVIII (4), 1651-1671.

Merton, R. C. (1974). On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance, 29, 449-470. http://dx.doi.org/10.1111/j.1540-6261.1974.tb03058.x

Nabi, M. S. and Bourkhis, Kh. (2013). Islamic and conventional banks' soundness during the 2007–2008 financial crisis. Review of Financial Economics, 22 (2), 68-77. http://dx.doi.org/10.1016/j.rfe.2013.01.001

Nash, R. C., and Sinkey, J. F. (1997). On competition, risk, and hidden assets in the market for bank credit cards. Journal of Banking & Finance, 21, 89-112. http://dx.doi.org/10.1016/S0378-4266(96)00030-1

Ouerghi, F. (2014). Are Islamic banks more resilient to global crisis than conventional banks? Asian Economic and Financial Review, 4 (7), 914-955.

Rashwan, M. H. (2012). How did listed Islamic and Traditional Banks Performed: pre and post the 2008 financial crisis? Journal of Applied Finance & Banking, 2 (2), 149-175.

Sinkey, J. F. (Jr.) (1988). Commercial bank financial management. Prentice Hall India Inc, 80-100.

Sinkey, J. F. and Nash, R. C. (1993). Assessing the riskiness and profitability of credit-card banks. Journal of Financial Services Research, 2, 127-150. http://dx.doi.org/10.1007/BF01046902

Stan, M., and McIntyre, M. (2012). Too big to fail? Size and risk in banking. Academy of Banking Studies Journal, 11(2), 11-21.

Vogel, F. E. and Yayes III, S. L. (1998). Islamic law and finance religion, risk, and return, Kluwer Law International.

Downloads

Published

2016-08-29

Issue

Section

Articles