Sharia supervisory boards,governance structures and operational risk disclosures: Evidence from Islamic banks in MENA countries

This paper examines the impact of Sharia supervisory board (SSB) and governance structures on the extent of operational risk disclosures (ORDs), using a sample of 63 Islamic banks from 10 (i.e., Bahrain, Egypt, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, and the UAE) countries in the Middle East and North Africa (MENA) region for the fiscal years 2006 to 2013. Drawing on Sharia compliance, Islamic banking and corporate governance literature, our findings are as follows. We find that SSB, block ownership, board independence, and country-level governance quality are statistically significant and positively associated with ORDs. Our results are robust when controlling for several bank- and country-level variables. Our study has implications for policy-makers and regulators in the MENA region with respect to the development and implementation of SSB and governance mechanisms that can improve operational risk disclosures. Finally, the findings highlight the need to enhance current understanding of SSB structures and governance mechanisms that can best help Islamic banks towards engaging in effective compliance with recent governance and accounting reforms.     

Banking efficiency in Gulf Cooperation Council (GCC) countries: A comparative study

We measure cost and profit efficiencies of banks operating in six GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) using heteroskedastic stochastic frontier (HSF) models. Our results show that measures of cost and profit efficiencies of banks vary widely across the six gulf countries over the same period. We examine whether cost and profit efficiencies of Islamic banks are significantly different from that of conventional banks. After allowing for bank risk, asset quality, environmental influences such as the level of interest rate, and country effect, we find that cost and profit efficiencies of Islamic banks are similar to that of conventional banks. Our results suggest that the country-specific variables have significant impact on cost and profit efficiencies of banks operating in GCC countries. Our findings indicate that cost and profit efficiencies of Islamic banks are more volatile than that of conventional banks.     

Competition and Concentration in the New European Banking Landscape

This paper measures the degree of concentration and competition in the enlarged European Union (EU) banking environment over the period 1998–2002. In the empirical part we opt for a methodology as proposed by Panzar and Rosse based on a non‐structural estimation of market competition. Our results suggest that European banks were operating under conditions of monopolistic competition and that bank interest revenues in the 10 new EU member states was earned under conditions of higher competition than those that existed in the old EU banking countries. The opposite result was observed for total operating revenues. Smaller banks earn interest income in a less competitive environment than larger banks, while the opposite is observed for total revenues.     

An investigation of compliance with international accounting standards by listed companies in the Gulf Co-Operation Council member states

This study investigates the extent of compliance with international accounting standards (IASs) by companies in the Gulf Co-Operation Council (GCC) member states (Bahrain, Oman, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates). Based on a sample of 137 companies (436 company-years) we find that compliance increased over time, from 68% in 1996 to 82% in 2002. Despite strong economic and cultural ties between the GCC states, there was significant between-country variation in compliance and among companies based on size, leverage, internationality, and industry. The study provides evidence of de jure but not de facto harmonization in the region. Noncompliance reflected some ineffectiveness in the functions of external auditors and enforcement bodies, which may be of interest to countries that have adopted IASs recently.     

Derivatives Usage in Emerging Markets Following the GFC: Evidence from the GCC Countries

In this article, we avail of International Accounting Standards IFRS 7 to investigate the usage and motivation of hedging by firms in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates). The results of our panel and cross-sectional data logistic regressions indicate a focus on foreign exchange exposure, interest rates risk, and commodity risk in this region. We find that the use of hedging instruments in this region is also influenced positively by the firm’s size and, to a lesser degree, positively by the firm’s gearing ratio and negatively by its propensity to growth. The level of activity, nevertheless, remains lower than is the case for firms globally.     

Critically Appreciating Social Accounting and Reporting in the Arab MiddleEast: A Postcolonial Perspective

There has been no comprehensive or detailed study in respect of social accounting and reporting practices in the Arab countries of the Middle East. Indeed, very little is known about accounting practices and accounting regulations in the Arab Middle East (AME hereafter), with most studies available in the English-speaking world being concerned mainly with the larger and more economically significant countries of the AME, such as Egypt and Saudi Arabia. This study attempts to fill this gap in the literature by exploring and bringing insights into social accounting and reporting practices in a selection of AME countries, namely: SaudiArabia, Kuwait, Qatar, Bahrain, Oman, United Arab Emirates (UAE), Syria, Jordan and Egypt. The concern of this study is to explore the actuality and potentiality of social accounting manifestations in the AME from a critical and postcolonial perspective. Pursuing a critical and postcolonial perspective that is sensitive to the context of the AME, it is concluded that social accounting manifestations in the AME are largely orientated towards ‘repressive/counter radical’ positions of accounting. The study, in addition, considers the potentiality of more radical positions of social accounting in the AME inspired by a critical approach and the particular history and culture of the AME.     

Competition in fragmented markets: New evidence from the German banking industry in the light of the subprime crisis

Of all of the EU member states, Germany has the largest banking market. However, not all German banking institutions necessarily face fierce competition. Because the industry is highly fragmented, strict separation of the three existing banking pillars may impede competition, with negative effects on financial stability. We assess the competitive stances of 1,888 universal banks from 2001 to 2009 by using the Panzar–Rosse revenue test. We find evidence that measuring competition at an average country level does not necessarily generate valid evaluations of fragmented markets. In addition, we find no clear indication that either the particular objectives of cooperative and savings banks or the legal protection of these institutions impedes competition or discriminates against private banks. Therefore, as long as the relationship between competition and financial stability is dubious, the overall effect and the social costs or benefits of political measures that influence the structure of the German banking market are at least questionable.     

The multinational bank: A financial MNC?

The theory of non-financial multinational corporations is applied to the multinational commercial bank. The incentives toward multinationality that characterize the expansion of non-financial firms have their counterparts in multinational banks. The theory of the MNC provides a useful basis for the development of a theory of the multinational bank when the subsidiary offices operate in foreign financial markets. When banks' foreign subsidiaries operate in supranational markets (such as the Eurocurrency markets), there is little or no equivalence because the multinational banks compete only among themselves: there is no competition with indigenous firms. The supranational markets give rise to a distinct type of subsidiary. These banking offices and the markets in which they operate serve to integrate national capital and money markets with some possible endangerment to the stability of the international financial system.     

Empirical assessment of the competitive conduct of Nigerian banks in a post-consolidation era

This paper is an empirical assessment of the level of competition in the Nigerian banking industry following the consolidation exercise, using a bank-level panel data, for the period 2005–2014. Empirical evidence from the Panzar and Rosse (1987) H-statistic reveals that market power in the Nigerian banking industry is consistent with monopolistic competition, which implies that firms are independent in their decision-making and conduct. This study innovates by incorporating non-interest income accounts in the assessment of revenue, and findings suggest that bank competitiveness decreases as revenue tends toward an inclusion of non-interest income or fee-based services.     

Restructuring,consolidation and competition in Latin American banking markets

This study examines the competitive conditions in the banking industries of eleven Latin American countries for the period 1993–2000. For these countries, the time interval under examination corresponds to an era characterized by substantial reforms to restructure their banking systems, increased consolidation and foreign bank penetration. The banks in our sample are found to be earning their revenues as if operating under monopolistic competition, as in many other developed and emerging financial systems. The results indicate that, overall, market concentration is not significantly related with competitive conduct. At the country level, however, we do observe a decline in competition for Brazil, Chile, and Venezuela in late 1990s which may be attributable to increased consolidation. Further, we observe that deregulation and opening up of the financial markets for foreign participation serves as an important catalyst to increase the competitiveness of banking markets. Higher degree of competition in the sector, in return, is associated with reduced bank margins and profitability but improved cost efficiency.     

Financial progress and the stability of long-run money demand: Implications for the conduct of monetary policy in emerging economies

This paper examines whether recent financial changes in three emerging market economies in the Gulf region (Bahrain, the UAE, and Qatar) have distorted the character and the stability of their underlying long-run money demand relations. Money demand instability prompts concerns about the appropriateness of targeting monetary aggregates and could weaken the presumed link between monetary policy and its ultimate objectives. Our results suggest that the quick pace of financial changes in the three emerging market economies did not cause undue shifts in their equilibrium money demand relations. Further evidence from direct tests of cointegration stability indicates the superiority of targeting M1 in the UAE and M2 for Qatar. In Bahrain, both M1 and M2 prove equally appropriate to guide monetary policy. Thus, despite the wave of financial developments that have recently swept the three Gulf economies, the evidence suggests that monetary authorities in these countries should maintain a close watch on monetary growth as a principal policy guide.     

Competitive conditions among the major British banks

This paper reports an empirical assessment of competitive conditions among the major British banks, during a period of major structural change. Specifically, estimates of the Rosse–Panzar H-statistic are reported for a panel of 12 banks for the period 1980–2004. The sample banks correspond closely to the major British banking groups specified by the British Banking Association. The robustness of the results of the Rosse–Panzar methodology is tested by estimating the ratio of Lerner indices obtained from interest rate setting equations. The results confirm the consensus finding that competition in British banking is most accurately characterised by the theoretical model of monopolistic competition. There is evidence that the intensity of competition in the core market for bank lending remained approximately unchanged throughout the 1980s and 1990s. However, competition appears to have become less intense in the non-core (off-balance sheet) business of British banks.     

Foreign participation and banking competition: Evidence from the Indonesian banking industry

Foreign participation in Indonesian banking has expanded from the establishment of foreign de novo banks into the acquisition of existing local banks. The increase in foreign participation has therefore not been associated with a growing number of banks. This study aims to examine the competitive behavior of foreign and local banks as a competitive banking industry is important in boosting economic efficiency and economic growth. This study also examines the role of modes of entry of foreign banks on competition, either through the establishment of foreign de novo banks or the acquisition of local banks. The recent methodological refinements of the Panzar–Rosse method developed by Bikker et al. (2011) are employed to estimate the level of competition among local and foreign banks. Generally, the foreign banks, particularly foreign de novo banks behaved more competitively than local banks, and their penetration is therefore important in creating a contestable market. This study found that in terms of assets, on average foreign de novo banks were smaller, more efficient, and had lower overhead costs, so they could offer lower loan rates and disburse more loans. The recent consolidation in the Indonesian banking industry may have an adverse impact on competition as it restricts the establishment of foreign de novo banks.     

Market power and firm risk: A test of the ‘quiet life’ hypothesis

This paper presents an empirical investigation of John R. Hicks' ‘quiet life’ hypothesis that firms in monopolistic markets will be more risk averse than firms in competitive markets. A sample of 6,500 unit banks is used in a multivariate regression analysis to test the relationship between market concentration and overall risk measured by the coefficient of variation, as well as certain financial ratios. Financial data are for the years 1969–1978. Test results are consistent with Hicks' ‘quiet life’ hypothesis. It is also notable that while most structure-performance studies in banking have found a quantitatively small effect of structure on performance, these results suggest that the effect may be fairly substantial.     

Do foreign banks increase competition? Evidence from emerging Asian and Latin American banking markets

In this paper we examine the impact of foreign bank penetration on the competitive structure of domestic banking sectors in host emerging economies. We focus our analysis on Asia and Latin America during the period 1997-2008. Using bank-level panel data to identify foreign banks and to estimate measures of banking competition, we are able to provide robust empirical evidence that an increase in foreign bank penetration enhances competition in these host countries’ banking sectors. We find that this positive foreign bank penetration and banking competition link is associated with a spillover effect from foreign banks to their domestic counterparts. This spillover effect becomes stronger when more efficient and less risky foreign banks enter into less concentrated host country markets. We also find that the spillover effect is greater when foreign banks enter in the form of ‘de novo penetration’ than through mergers or acquisitions of domestic banks (‘M&A penetration’).     

Market Size, Service Quality, and Competition in Banking

Local banking markets depict enormous variation in population size. Yet this paper finds that the nature of bank competition across markets is strikingly similar. First, markets remain similarly concentrated regardless of size. Second, the number of dominant banks is roughly constant across markets of different size; it is the number of fringe banks that increases with market size. Third, service quality increases in larger markets and is higher for dominant banks. The findings suggest that banks use fixed-cost quality investments to capture the additional demand when market size grows, thereby raising barriers to entry.     

Market power in local banking monopolies

By means of two NEIO techniques, this paper analyzes the conduct of a group of Italian single-branch banks operating as monopolists in small local areas (municipalities) in the years 1988–2005, in order to assess pricing behavior in highly concentrated banking markets. Both tests strongly reject the hypothesis of pure monopoly pricing: regardless the advantageous condition, these banks are able to exploit only partially their market power, principally by reason of the nearby competition, the latest banking consolidation trend and the local presence of big banks. Employing another sample, we also show that in duopolistic markets the conduct of single-branch banks is virtually competitive.     

How Does Cross‐Border Activity Affect EU Banking Markets?

Cross‐border activity in the EU is widely viewed as a necessary condition for the implementation of a single banking market and therefore as a positive factor for the enhancement of competition and cost performance in the region. In this paper, we analyse the relevance of this view by investigating whether cross‐border activity really promotes competition and cost efficiency in EU banking markets. We also consider the potential role of a bank's mode of entry by comparing existing domestic banks that foreign banks take over (mergers and acquisitions) with new branches created by foreign banks, often through subsidiaries (greenfield operations). We consider the impact of cross‐border banks on cost efficiency (measured by the stochastic frontier approach), profitability (assessed through return on assets) and competition (measured by the Lerner index). We find that greenfield banks enhance cost efficiency and competition, while mergers and acquisitions hamper competition and cost efficiency. Therefore, our results suggest that EU authorities should promote only greenfield banks rather than all cross‐border entries.     

Banks as Catalysts for Industrialization

We provide a new theory of the role of banks as catalysts for industrialization. In their influential analysis of continental European industrialization, Gerschenkron and Schumpeter argued that banks promoted the creation of new industries. We formalize this role of banks by introducing financial intermediaries into a “big push” model. We show that banks may act as catalysts for industrialization provided they are sufficiently large to mobilize a critical mass of firms and that they possess sufficient market power to make profits from coordination. The theory provides simple conditions that help explain why banks seem to play a creative role in some but not in other emerging markets. The model also shows that universal banking helps to reduce the cost of acting as catalyst. Journal of Economic Literature Classification Numbers: G21, N2, O14, O16.     

Is the dollar peg suitable for the largest economies of the Gulf Cooperation Council?

The slumping of the GCC currencies against other major currencies and the ensuing rising imported inflation have sparked an ongoing debate about the viability of the dollar peg. This paper extends and applies the contribution of Berger et al. (2001) to the largest economies of the GCC, namely Saudi Arabia, Qatar, and the UAE, by introducing a foreign inflation dimension. Empirical estimations suggest little or no evidence supporting the suitability of a fixed exchange rate regime in any of the three analyzed economies. It is this paper's contention that policy makers ought to play an immediate and active role in identifying a suitable more flexible exchange rate regime as well as an achievable timeline and road map to effectively abandoning the dollar peg.