Financial stability of Islamic banking and the global financial crisis: Evidence from the Gulf Cooperation Council

Using a sample of 76 banks from the Gulf Cooperation Council region, we use accounting- as well as market-based measures of financial stability to examine whether Islamic banks outperformed conventional banks in the time of financial shocks during the period 2000–2013. We find that the difference between the two banking types was initially not significant during the GFC. However, when the financial shock spread to the real economy during the later phases of the crisis, Islamic banks suffered a significantly higher level of financial instability than conventional banks. This result holds true for large banks but not for small Islamic banks. Small Islamic banks demonstrated a relatively better handling of the economic downturn than large Islamic banks, supporting the argument that Islamic banks are more stable when they operate at a small scale but lose this stability when they increase their scale of operations. Hence, while Islamic banks may have escaped the consequences of highly volatile financial instruments, they were not spared from a major shock in the real economic sectors.     

What makes Islamic banks different? A multivariate approach

Using data from 8615 banks (including 123 Islamic banks) in 124 developed and developing countries for the period between 2006 and 2012, we examine the financial characteristics that distinguish between conventional and Islamic banks. As banks’ financial characteristics are multi-faceted concepts, our indicators are constructed using principal component analysis. We find that Islamic banks are more capitalized, more liquid and more profitable, but have more volatile earnings compared to US and European banks. However, similarities in terms of liquidity and earnings volatility are more noticeable when the sample is limited to banks operating in countries where both systems coexist. Finally, we find that higher capital makes the returns of Islamic banks more volatile, while higher liquidity decreases the profitability of conventional banks.     

The evolution of scale economies in US banking

Continued consolidation of the US banking industry and a general increase in the size of banks have prompted some policymakers to consider policies that discourage banks from getting larger, including explicit caps on bank size. However, limits on the size of banks could entail economic costs if they prevent banks from achieving economies of scale. This paper presents new estimates of returns to scale for US banks based on nonparametric, local‐linear estimation of bank cost, revenue, and profit functions. We report estimates for both 2006 and 2015 to compare returns to scale some 7 years after the financial crisis and 5 years after enactment of the Dodd–Frank Act with returns to scale before the crisis. We find that a high percentage of banks faced increasing returns to scale in cost in both years, including most of the 10 largest bank holding companies. Also, while returns to scale in revenue and profit vary more across banks, we find evidence that the largest four banks operate under increasing returns to scale.     

Profit distribution management by Islamic banks: An empirical investigation

The objective of this paper is to ascertain whether Islamic banks do in fact manage profit distributions and if so, what factors are associated with the extent of profit distribution management. The results suggest that most Islamic banks manage profit distributions, with the extent of profit distribution directly related to religiosity, financial development, asset composition, and existence of discretionary reserves, while it is inversely related to market familiarity with Islamic banking, market concentration, depositor funding reliance and the age of the Islamic bank.     

Comparisons of Economic Inefficiency Between Output and Input Measures of Technical Inefficiency Using the Fourier Flexible Cost Function

The current paper constructs a Fourier flexible cost function, which is commonly known to be a more general function form than the typical translog form, and can globally approximate a true (but unknown) cost function. Both allocative and technical inefficiencies are considered using the Fourier function in the context of the parametric approach. The former is modeled using shadow input prices and the latter is formulated either by adding an extra term of scale parameter (when the Farrell's (1957) input technical inefficiency is assumed), or by correcting all the terms involving output quantities by a scale parameter (when the Farrell's output technical inefficiency is assumed). It is found that sample banks could save up to 23% of total costs, within the range of 3 and 69% uncovered by the previous works, in which allocative inefficiency plays a more important role than technical inefficiency. Furthermore, the cost of misallocated labor input alone constitutes more than 80% of total allocative inefficiency. Financial deregulation starting from 1991 in Taiwan appears to have improved economic efficiency of the banking industry.     

Structural changes,competition and bank stability in Malaysia’s dual banking system

This paper assesses Malaysia’s competition landscape and its risk implications subsequent to conventional banking consolidation and Islamic banking penetration in the aftermath of the 1997/1998 Asian financial crisis. Employing a panel sample of conventional and Islamic commercial banks, it arrives at the following conclusions. First, the consolidation exercise, which has led to a significant reduction in the number of domestic commercial banks, has not stifled banking competition. Second, the paper provides empirical support for the competition-stability relationship, particularly for the conventional banking sector. Islamic banking sector risk appears to be neutral to market competition or market power, although there is limited evidence that it increases with overall market concentration. Finally, the analysis uncovers the risk-increasing effect of the Islamic banking market structure on the conventional banking sector. By contrast, conventional banking market concentration tends to reduce the credit risk of Islamic banks.     

Board Determinants in Banking Industry. An International Perspective

This paper explores the factors influencing the board composition of an international sample of commercial banks over the period 1996–2006. After considering the dual role of the board as monitor and advisor, our analysis shows that no one board composition is optimal for the banking industry and that any such recommendation could harm bank governance. Our results suggest that more complex banks that have a low ownership concentration and are headquartered in a civil law country should have larger and more independent boards. Copyright © 2012 John Wiley & Sons, Ltd.     

Inefficiency and heterogeneity in Turkish banking: 1990–2000

Recent studies have stressed the importance of privatization and openness to foreign competition for bank efficiency and economic growth. We study bank efficiency in Turkey, an emerging economy with great heterogeneity in bank types and ownership structures. Earlier studies of Turkish banking had three limitations: (i) excessive reliance on cost‐function frontier analyses, wherein volume of loans is a measure of banking output; (ii) pooling all banks or imposing ad hoc heterogeneity assumptions; and (iii) lack of a comprehensive panel data set for proper analysis of productivity and heterogeneity. We use an estimation–classification procedure to find likelihood‐driven classification of bank technologies in an 11‐year panel. In addition, we augment traditional cost‐frontier analysis with a labour‐efficiency analysis. We conclude that state banks are not particularly inefficient overall, but that they do utilize labour inefficiently. This partially supports recent calls for privatization. We also conclude that special finance houses (or Islamic banks) utilize the same technology as conventional domestic banks, and do so relatively efficiently. This suggests that they do not cause harm to the financial system. Finally, we conclude that foreign banks utilize a different technology from domestic ones. This suggests that one should not overstate their value to the financial sector. Copyright © 2005 John Wiley & Sons, Ltd.     

Cost and profit efficiency of conventional and Islamic banks in GCC countries

Using stochastic frontier approach, this paper investigates the cost and profit efficiency levels of 71 commercial banks in Gulf cooperation council countries over the period 1999–2007. This study also conducts a comparative analysis of the efficiency across countries and between conventional and Islamic banks. Moreover, we examine the bank-specific variables that may explain the sources of inefficiency. The empirical results indicate that banks in the Gulf region are relatively more efficient at generating profits than at controlling costs. We also find that in terms of both cost and profit efficiency levels, the conventional banks on average are more efficient than Islamic banks. Furthermore, we observe a positive correlation of cost and profit efficiency with bank capitalization and profitability, and a negative one with operation cost. Higher loan activity increases the profit efficiency of banks, but it has a negative impact on cost efficiency.     

Instability spillovers in the banking sector: A spatial econometrics approach

In the study, we employ a dynamic spatial panel model to identify factors that are the sources of instability spillover in the banking sector. Using a sample of publicly listed banks, we document that the stability of a bank depends not only on its own characteristics and the macroeconomic conditions of its home country, but also on the stability of other banks in the same and other countries. We find weak evidence that the spillover effects are greater from domestic banks than from foreign ones. This study has significant implications for market regulators in terms of the role of country interdependence as a spillover mechanism during times of financial turbulence.     

Productivity and efficiency at bank holding companies in the U.S.: a time-varying heterogeneity approach

This paper investigates the productivity and efficiency of large bank holding companies (BHCs) in the United States over the period 2004–2013, by estimating a translog stochastic distance frontier (SDF) model with time-varying heterogeneity. The main feature of this model is that a multi-factor structure is used to disentangle time-varying unobserved heterogeneity from inefficiency. Our empirical results strongly suggest that unobserved heterogeneity is not only present in the U.S. banking industry, but also varies over time. Our results from the translog SDF model with time-varying heterogeneity show that the majority of large BHCs in the U.S. exhibit increasing returns to scale, a small percentage exhibit constant returns to scale, and an even smaller percentage exhibit decreasing returns to scale. Our results also show that on average the BHCs have experienced small positive or even negative technical change and productivity growth.     

Economies of scale and organization efficiency in banking

Previous studies attempting to assess economies of scale in banking firms have largely relied upon cost functions. The profit-function approach enjoys several important advantages over the cost-function method, consequently that is the approach used in this study. A risk-adjusted profit function estimates economies of scale of unit and branch banks; and the effects of bank holding-company affiliation on the level of bank profits is also examined. The results indicate larger economies of scale for branch banks than for unit banks; and bank holding-company affiliates were found to be more efficient than independent banks.     

Cyclicality of bank credit growth: Conventional vs Islamic banks in the GCC

Using a panel of 104 banks from the six Gulf Council Countries, we investigate the cyclicality of credit growth with regard to the discrepancies between Islamic banks and conventional banks. We found that Islamic banks are pro-cyclical and have higher credit growth compared to conventional banks. Indeed, the Profit and Loss Sharing (PLS) mechanism helps Islamic banks not to curb their credit growth during adverse economic conditions. We tested the role of the growth rate of market sentiment and found that positive market sentiment leads to higher bank credit growth. Furthermore, we investigate the impact of several bank-specific variables on bank credit growth and discuss to what extent diversification and the investment portfolio reshape the credit growth process.     

Corporate social responsibility and Islamic banks: a systematic literature review

Although CSR is an extensively studied topic, a systematic, comprehensive and diverse review in the domain of CSR and Islamic banking is missing. This paper intends to present a broad review of this domain. Through a state-of-the-art review, we have divided the paper into different sections, the first two are general i.e. CSR measurement, it deals with measuring methods of CSR in Islamic banking, and CSR theories, it gives a brief overview of theories referred in under-review studies. While, the other three sections are separated according to the nature of studies i.e. CSR narrative under the Islamic paradigm, CSR disclosure by Islamic banks, and CSR exposition in Islamic banks. At the end of each section, we have included a ‘commentary’ to discuss and summarize major points, highlight trends and issues, provide insights into limitations and suggest future research directions.

     

银行业改革、赶超与开放——基于Malmquist TFP指数的实证分析

为评估近年来中国国有银行改革、城市商业银行赶超与银行业对外全面开放5年来外资银行效率的变化,主要采取"中介法",利用2005～2010年数据对中国本土和外资银行Malmquist TFP指数及其组成部分进行了测算分解和实证分析。研究表明:改革促进了中国银行业效率的提高;城市商业银行的"赶超"战略显著提升了效率;中国本土银行的纯技术效率亟待改善;中国银行业对外全面开放后,外资银行的全要素生产率有所提高,但规模效率和技术进步有待改进;股权/资产比率等因素降低了银行效率。     

Technology and Cost Efficiency in Universal Banking A “Thick Frontier”-Analysis of the German Banking Industry

Using 1992 data of 1490 banks covering about 40% of German banking, we specify a multi-product translog cost function and follow the thick frontier-approach to control for cost inefficiency when evaluating the technology of banking. Scale economies are found to exist up to a size of about 5 billion DM of total assets, with diseconomies being caused by non-operating costs. There is hardly any evidence of economies of scope. Compared to cost inefficiency external factors play a surprisingly strong role in explaining cost differences between high-cost and low-cost banks. Smaller banks turn out to be more responsive to input prices.     

Liquidity,bank runs,and fire sales under local thinking

We examine the implications on banking crises when markets are populated by agents that neglect tail risks and form expectations conditioned on a favorable subset of possible states of the economy. We find that optimal bank liquidity is lower than would be the case under rational expectations, and, consequently, the banking system is more vulnerable to adverse shocks, which lead to bank runs. Asset pledgeability of surviving banks is also affected so that their capacity to raise external funds for purchasing assets of distressed banks is weakened. Further, we examine the case when asset returns are correlated through securitization. In this case adverse shocks are felt uniformly across the banking sector and banks that survive with the help of a public liquidity backstop will become risk-averse and reluctant to purchase distressed assets. Finally, we explore a government funded asset purchase program, that is implemented with an asset price target.     

The impacts of competition and shadow banking on profitability: Evidence from the Chinese banking industry

This paper contributes to the empirical literature on banking profitability by testing the impacts of competition and shadow banking on bank profitability using a sample of 100 Chinese commercial banks over 2003–2013 with 417 and 395 observations. The current study fills the gaps in the empirical studies by examining the competition in different banking markets (i.e. deposit market, loan market and non-interest income market) in China and further evaluating their impacts on bank profitability. The findings show that the non-interest income market has a higher level of competition compared to the deposit market and loan market. It is further reported that a lower level of competition in deposit market leads to an increase in the profitability of Chinese commercial banks. Finally, the results suggest that shadow banking improves the profitability of Chinese banks.     

The impact of bank competition and concentration on bank risk-taking behavior and stability: Evidence from GCC countries

This paper presents a comprehensive assessment of the impact of competition on bank fragility pre and post financial crisis period in the GCC banking market as measured by bank risk-taking behavior and bank stability during the period 1998–2016. Our results indicate that a higher level of bank competition and the greater degree of concentration adds to financial fragility. The findings further shows that during the 2008 crisis, lower bank competition maintain the stability of GCC banks. We also find that lower level of competition and lower concentration in the banking market increases the risk-taking behavior of the low capitalized, low liquid and small banks which add to fragility in the banking system. Our findings suggest that countries with greater capital stringency, greater supervisory power, greater market discipline, and private monitoring, with explicit deposit insurance schemes, higher shareholder protection, and higher legal efficiency decrease banks’ risk-taking and increase their stability. We also find that greater regulatory restrictions and higher creditor protection decrease banks’ stability and increase risk in concerned countries. We find support for both competition-fragility and competition-stability hypotheses in the GCC banking market. The results also confirm that the use of a single measure of competition is insufficient to assess the role of competition in banking stability.     

National versus supranational bank regulation: Gains and losses of joining a banking union

We ask how the structure of international banking affects the decision of a national regulator to join a banking union and to transfer regulatory powers to the supranational level. The focus is on bank supervision and bank resolution. A national regulator ignores possible gains or losses, which accrue to other jurisdictions if banks are internationally active. A supranational regulator takes these regulatory external effects into account. While supranational regulation improves total welfare, this is not necessarily the case for welfare in single countries. By analyzing the size and determinants of spillover effects we show how they constrain a country’s willingness to participate in a banking union. Our results may explain why some member states of the European Union currently hesitate to join the European Banking Union.