Efficiency in Islamic and conventional banking: an international comparison

The paper investigates the efficiency of a sample of Islamic and conventional banks in 10 countries that operate Islamic banking for the period 1996–2002, using an output distance function approach. We obtain measures of efficiency after allowing for environmental influences such as country macroeconomic conditions, accessibility of banking services and bank type. While these factors are assumed to directly influence the shape of the technology, we assume that country dummies and bank size directly influence technical inefficiency. The parameter estimates highlight that during the sample period, Islamic banking appears to be associated with higher input usage. Furthermore, by allowing for bank size and international differences in the underlying inefficiency distributions, we are also able to demonstrate statistically significant differences in inefficiency related to these factors even after controlling for specific environmental characteristics and Islamic banking. Thus, for example, our results suggest that Sudan and Yemen have relatively higher inefficiency while Bahrain and Bangladesh have lower estimated inefficiency. Except for Sudan, where banks exhibits relatively strong returns to scale, most sample banks exhibit very slight returns to scale, although Islamic banks are found to have moderately higher returns to scale than conventional banks. While this suggests that Islamic banks may benefit from increased scale, we would emphasize that our results suggest that identifying and overcoming the factors that cause Islamic banks to have relatively low potential outputs for given input usage levels will be the key challenge for Islamic banking in the coming decades.     

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.     

Corporate governance and corporate social responsibility (CSR) reporting: an empirical evidence from commercial banks (CB) of Pakistan

The aim of this paper is to explore Pakistani listed commercial banks corporate social responsibility (CSR) reporting information along with the probable effects of different corporate governance (CG) elements on CSR disclosures. Furthermore, the relevance of different theories in explaining the results of this study is also provided. For analyzing the banks’ CSR reporting practice, which was done using content analysis, the annual reports for the years 2005–2010, of all the commercial banks were examined. Non-executive directors and foreign directors which are elements of CG were considered and multiple regression analyses were carried out to check the impact of CG elements on banks’ CSR reporting initiatives. The results of the study reveal that even though reporting of CSR is voluntary in Pakistan, the participation of Pakistani commercial banks in different CSR activities is not low. Furthermore, the level of CSR activities performed by the banks is impressive. The results displayed that non-executive directors have a positive impact on the CSR reporting supporting stewardship theory in CB of Pakistan. The major limitation of this study is that the data is only based on annual reports of commercial banks of Pakistan. It is therefore, not easier to generalize the findings of this research to other corporate sectors. Secondly the annual reports of commercial banks for the years 2005–2010, a time period of just 6 years were analyzed as access to data before and after the specified years was not readily available. This paper relates CSR disclosure with possible impact of CG in the particular perspective of a transitional economy’s banks such as Pakistan. By providing empirical facts of the effect of CG structure on the CSR activities practices in developing countries’ banking sector setting, this paper provides novel contribution to the current CSR literature.     

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.     

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.     

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.     

CORPORATE SOCIAL RESPONSIBILITY: A MICROECONOMIC REVIEW OF THE LITERATURE

This paper provides a review of the theoretical and empirical literature on Corporate Social Responsibility (CSR). Depending on whether an individual can be considered as selfish, or whether she has also social preferences, motives for CSR, can be explained in different ways. Furthermore, we explicitly highlight the influence of different Corporate Governance System on CSR as well as the relationship between firms' size and social commitment. Because it is difficult to distinguish between different theories in empirical studies, we argue that an experimental approach might be suitable to test theories of CSR.     

ISLAMIC BANKING AND FINANCE: RECENT EMPIRICAL LITERATURE AND DIRECTIONS FOR FUTURE RESEARCH

This paper examines the recent empirical literature in Islamic banking and finance, highlights the main findings and provides a guide for future research. Early studies focus on the efficiency, production technology and general performance features of Islamic versus conventional banks, whereas more recent work looks at profit‐sharing and loss‐bearing behaviour, competition, risks as well as other dimensions such as small business lending and financial inclusion. Apart from key exceptions, the empirical literature suggests no major differences between Islamic and conventional banks in terms of their efficiency, competition and risk features (although small Islamic banks are found to be less risky than their conventional counterparts). There is some evidence that Islamic finance aids inclusion and financial sector development. Results from the empirical finance literature, dominated by studies that focus on the risk/return features of mutual funds, finds that Islamic funds perform as well, if not better, than conventional funds – there is little evidence that they perform worse than standard industry benchmarks.     

Positive Theories of Multinational Banking: Eclectic Theory Versus Internalisation Theory

The choice of an appropriate paradigm to consider banks’ motivation to enter a new market and their subsequent performance is an important issue in multinational banking. This paper discusses this issue within the context of two competing theories of the multinational enterprise and the special theories of banking as applied to the multinational enterprise. The conclusion of this paper is that while it may not be possible to empirically distinguish between the propositions of Eclectic theory and Internalisation theory, Internalisation theory offers a framework with greater internal consistency for the study of the multinational bank. Further, any empirical studies must be conducted within the framework of the appropriate special theories consistent with internalisation theory. These special theories have developed over time in an unstructured fashion, and the application of internalisation theory provides a cohesive framework within which to analyse these theories.     

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.     

Do Islamic Banks Employ Less Earnings Management?

In this article, we examine whether Islamic banks are less likely to manage their earnings than non‐Islamic banks and how Islamic banks’ unique corporate governance system, especially Shari'ah Supervisory Boards, impacts earnings management behaviors within Islamic banks. Using a sample of Islamic banks and their matched non‐Islamic banks in 15 countries, we find that, first, Islamic banks are less likely to conduct earnings management as measured by both earnings loss avoidance and abnormal loan loss provisions. Second, there are no significantly different earnings management behaviors between Islamic banks with and without Shari'ah Supervisory Boards. Third, several Shari'ah Supervisory Board characteristics, such as size and the presence of members from Auditing Organization for Islamic Financial Institutions, are important determinants of the earnings management of Islamic banks who have Shari'ah Supervisory Boards.     

Investor protection,regulation and bank risk-taking behavior

This paper examines whether the influence of investor protection on banks’ risk is channeled through banking regulation, and vice-versa, using panel data from a sample of 567 European and US banks for the 2004–2015 period. As banking regulatory factors, we consider capital stringency, activity restrictions and private monitoring, whereas as investor protection factors, we consider the level of shareholder and creditor protection. We find that banking regulation moderates the positive direct influence of investor protection on banks’ risk, while investor protection reinforces the negative direct influence of banking regulation on risk. Moreover, we show that the negative effect of national regulations on banks’ risk is more pronounced during systemic crisis years. Finally, taking into account market competition, we argue that private monitoring only has a direct effect on banks’ risk, whereas the effects of capital stringency and activity restriction are channeled through market competition.     

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.     

Understanding the consequences of diversification on financial stability

In this paper, we study the consequences of diversification on financial stability and social welfare using an agent based model that couples the real economy and a financial system. We validate the model against its ability to reproduce several stylized facts reported in real economies. We find that the risk of an isolated bank failure (i.e. idiosyncratic risk) is decreasing with diversification. In contrast, the probability of joint failures (i.e. systemic risk) is increasing with diversification which results in more downturns in the real sector. Additionally, we find that the system displays a “robust yet fragile” behaviour particularly for low diversification. Moreover, we study the impact of introducing preferential attachment into the lending relationships between banks and firms. Finally, we show that a regulatory policy that promotes bank–firm credit transactions that reduce similarity between banks can improve financial stability whilst permitting diversification.

     

Systemic risk governance in a dynamical model of a banking system with stochastic assets and liabilities

We consider the problem of governing systemic risk in an assets–liabilities dynamical model of a banking system. In the model considered, each bank is represented by its assets and liabilities. The net worth of a bank is the difference between its assets and liabilities and bank is solvent when its net worth is greater than or equal to zero; otherwise, the bank has failed. The banking system dynamics is defined by an initial value problem for a system of stochastic differential equations whose independent variable is time and whose dependent variables are the assets and liabilities of the banks. The banking system model presented generalizes those discussed in Fouque and Sun (in: Fouque, Langsam (eds) Handbook of systemic risk, Cambridge University Press, Cambridge, pp 444–452, 2013) and Fatone and Mariani (J Glob Optim 75(3):851–883, 2019) and describes a homogeneous population of banks. The main features of the model are a cooperation mechanism among banks and the possibility of the (direct) intervention of the monetary authority in the banking system dynamics. By “systemic risk” or “systemic event” in a bounded time interval, we mean that in that time interval at least a given fraction of banks have failed. The probability of systemic risk in a bounded time interval is evaluated via statistical simulation. Systemic risk governance aims to maintain the probability of systemic risk in a bounded time interval between two given thresholds. The monetary authority is responsible for systemic risk governance. The governance consists in the choice of assets and liabilities of a kind of “ideal bank” as functions of time and in the choice of the rules for the cooperation mechanism among banks. These rules are obtained by solving an optimal control problem for the pseudo mean field approximation of the banking system model. Governance induces banks in the system to behave like the “ideal bank”. Shocks acting on the banks’ assets or liabilities are simulated. Numerical examples of systemic risk governance in the presence and absence of shocks acting on the banking system are studied.

     

Bank valuation in new EU member countries

This paper studies the role of institutional reforms in affecting bank valuation in new European Union (EU) member countries. It takes advantage of the dynamic nature of institutional reforms in transition economies and explores the causal effects of those reforms on banks’ Tobin's Q over the period of 1997–2008. Using a difference-in-difference approach, the paper shows that Tobin's Q increases substantially after these countries reform their legal institutions and liberalize banking. However, it decreases after stock market reforms. After further examination of the interactive relationships between different reforms and bank valuation, it is observed that when the banking reform is well implemented, legal reform can have a stronger impact on banks’ Tobin's Q. On the other hand, banking reform and security market reform has a substitutive relationship. The analysis also suggests that foreign ownership, market power, and asset diversification significantly affect Tobin's Q. These results are robust even after simultaneously controlling for equity risk.     

我国商业银行操作风险成因及对策分析

2010年底,我国将有第一批商业银行开始实施新巴塞尔协议,这标志着中国银行业的全面风险管理体系建设正式步入轨道。作为商业银行三大主要风险之一的操作风险,因为相关研究起步晚,管理滞后,成为银行业关注的重点。本文结合国内商业银行的实际,深入剖析当前我国商业银行操作风险产生的原因,并提出强化操作风险管理的对策。     

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.     

Credit risk pricing and the rationality of lending decision-making within dual banking systems: A parametric approach

The reduction of non-performing loans, and making correct provisions for them, plays a primary role in the management and minimization of banking credit risk. However, these actions depend primarily upon the cost at which banks may dispose of these bad loans. Hence, this study aims to perceive the price of banks’ credit risk via estimating the shadow price of non-performing loans. We assess and compare the perceived price of the credit risk of Islamic and conventional banks operating in 9 countries from the Middle East and Asia, using a quadratic directional distance function. Following this, we evaluate the impact of different settings of directional vectors on shadow prices by conducting a risk-sensitivity analysis. Applying bootstrap regression, the factors affecting NPLs’ prices are further investigated. The paper concludes that the estimation of the shadow prices of bad loans can provide important elements in favor of credit risk management and, therefore, credit risk mitigation.     

Emergence of a core-periphery structure in a simple dynamic model of the interbank market

This paper studies a simple dynamic model of interbank credit relationships. Starting from a given balance sheet structure of a banking system with a realistic distribution of bank sizes, the necessity of establishing interbank credit connections emerges from idiosyncratic liquidity shocks. Banks initially choose potential trading partners randomly, but over time form preferential relationships via an elementary reinforcement learning algorithm. As it turns out, the dynamic evolution of this system displays a formation of a core-periphery structure with mainly the largest banks assuming the roles of money center banks mediating between the liquidity needs of many smaller banks. Statistical analysis shows that this evolving interbank market shares the majority of the salient characteristics of interbank credit relationship that have been put forth in recent literature. Preferential interest rates for borrowers with strong attachment to a lender may prevent the system from becoming extortionary and guarantee the survival of the small peripherical banks.