The determinants of Islamic bank capital decisions |
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| Institution: | 1. Department of Finance, John Molson School of Business, Concordia University, 1455 Blvd. de Maisonneuve West, Montréal, QC H3G 1M8, Canada;2. Department of Economics and Finance, University of New Orleans, New Orleans, LA 70148, USA;3. College of Business and Public Management, University of La Verne, 1950 Third St., La Verne, CA 91750, USA;1. Department of Finance, Deakin Business School, Faculty of Business and Law, Deakin University, 221 Burwood Highway, Burwood, Vic 3125, Australia;2. Suleman Dawood School of Business, Lahore University of Management Sciences, Sector U, DHA, Lahore Cantt. 54792, Pakistan;3. Department of Finance, School of Business Administration, American University of Sharjah, United Arab Emirates;1. School of Graduate Studies, International Centre for Education in Islamic Finance (INCEIF), Lorong Universiti A, 59100 Kuala Lumpur, Malaysia;2. Suleman Dawood School of Business, Lahore University of Management Sciences (LUMS), Opp Sector U, DHA IV, Lahore, Pakistan |
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| Abstract: | We report new evidence on the bank and institutional determinants of Islamic bank capital ratios in 28 countries between 1999 and 2013. Overall, we find that smaller, more profitable, and highly liquid Islamic banks are more highly capitalized. Additionally, improvements in the economic and financial environments and market discipline within a country correspond with higher Islamic bank capitalization. The results shed light on the impact that Sharia'a law restrictions have on Islamic banking capitalization. Our findings are most robust to banks that choose to hold capital well in excess of that required by regulators, consistent with traditional capital structure theory. Our results highlight the role that stable economic and political systems play in improving bank capitalization and reducing financial sector risk. By reducing political instability and corruption, improving legal systems, and encouraging access to capital markets, policymakers may incentivize managers to make financing decisions that increase the capitalization of the Islamic banking industry in developing countries. |
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