Browse > Article
http://dx.doi.org/10.13106/jafeb.2020.vol7.no11.747

The Impact of the Bank Regulation and Supervision on the Efficiency of Islamic Banks  

MOHD NOOR, Nor Halida Haziaton (Faculty of Business and Management, UiTM Kelantan)
BAKRI, Mohammed Hariri (Faculty of Technology Management and Technopreneurship, Universiti Teknikal Malaysia)
WAN YUSOF, Wan Yusrol Rizal (Faculty of Business and Management, UiTM Kelantan)
MOHD NOOR, Nor Raihana Asmar (Faculty of Business and Management, UiTM Kelantan)
ZAINAL, Nurazilah (Faculty of Business and Management, UiTM Kelantan)
Publication Information
The Journal of Asian Finance, Economics and Business / v.7, no.11, 2020 , pp. 747-757 More about this Journal
Abstract
This study investigates the impact of bank regulation and supervision on the efficiency of banking sectors on 108 Islamic banks from 26 countries offering Islamic banking and finance products and services. The technical efficiencies of individual Islamic banks have been analyzed using the data envelopment analysis method (DEA). The ordinary least square estimation method is employed to examine the impact of country supervision and regulation on the technical efficiency of Islamic banks. The empirical findings suggest that supervisory power, activity restrictions and private monitoring positively influence the efficiency of Islamic banks. The study revealed that Islamic banks that are operating in Middle East and North Africa (MENA) and middle-income countries are more technically efficient given the less stringent rules on capital requirement and we found that there is statistically significant evidence that higher capital requirements are negatively associated with the efficiency of Islamic banks. The empirical findings of this study are expected to help policy-makers and government officials to better understand how their decisions affect the performance.
Keywords
Supervision; Bank Regulation; Islamic Banks; Income Level; Data Envelopment Analysis;
Citations & Related Records
Times Cited By KSCI : 6  (Citation Analysis)
연도 인용수 순위
1 Barth, J. R., Dopico, L. G., Nolle, D. E., & Wilcox, J. A. (2002). Bank safety and soundness and the structure of bank supervision: A cross-country analysis, International Review of Finance, 3(3/4), 163-188. https://doi.org/10.1111/j.1369-412X.2002.00037.x   DOI
2 Barth, J. R., Caprio, G., & Levine, R. (2004). Bank regulation and supervision: What works best?. Journal of Financial Intermediation, 13(2), 205-248. https://doi.org/13:205-248.10.3386/w9323   DOI
3 Barth, J. R., Caprio Jr, G., & Levine, R. (2006). Rethinking Bank Regulation: Till Angels Govern. Cambridge University Press.
4 Barth, J. R., Caprio, G., & Levine, R. (2008). Bank regulations are changing: For better or worse. Comparative Economic Studies, 50(4), 537-563. https://doi.org/10.1057/ces.2008.33   DOI
5 Barth, J. R., Liy, A. T., & Luy D. W. (2010). Bank regulation in the United States, CESifo Economic Studies, 56(1), 112-140. https://doi.org/10.1093/CESIFO/IFP026   DOI
6 Barth, J. R., Caprio Jr., G., & Levine, R. (2013). Bank regulation and supervision in 180 countries from 1999 to 2011. Journal of Financial Economic Policy, 5(2), 111-219. https://doi.org/10.1108/17576381311329661   DOI
7 Beck, T., Demirguc-Kunt, A., & Levine, R. (2006). Bank concentration, competition, and crises: First results. Journal of Banking and Finance, 30(5), 1581-1603. https://doi.org/10.1016/j.jbankfin.2005.05.010   DOI
8 Alam, N., & Al-Amri, H. A. (2020). Service quality perception and customer satisfaction in Islamic banks of Oman. Journal of Asian Finance, Economics and Business, 7(9), 499-504. https://doi.org/10.13106/jafeb.2020.vol7.no9.499   DOI
9 Ali, R., Ismail, S., & Bakri, M. (2015). Proposed Islamic educational loan-backed securities for quality life of university graduates in Malaysia. Procedia-Social and Behavioral Sciences, 201, 85-92. https://doi.org/10.1016/j.sbspro.2015.08.134   DOI
10 Charnes, A., Cooper, W. W., & Rhodes, E. (1978). Measuring efficiency of decision making units. European Journal of Operations Research, 6, 429-444. https://doi.org/10.1016/0377-2217(78)90138-8   DOI
11 Chortareas, G. E., Garza-Garcia, J. G., & Girardone, C. (2010). Banking sector performance in some Latin American countries: Market power versus efficiency. Working Papers (No. 2010-20).
12 Chortareas, G., Girardone, C., & Ventouri, A. (2011). Financial frictions, bank efficiency and risk: Evidence from the Eurozone. Journal of Business, Finance and Accounting, 38(1-2), 259-287. https://doi.org/10.1111/j.1468-5957.2010.02226.x   DOI
13 Staikouras, C., Mamatzakis, E., & Koutsomanoli-Filippaki, A. (2008). An empirical investigation of operating performance in the new European banking landscape. Global Finance Journal, 19, 32-45.   DOI
14 Sufian, F., Kamarudin, F., & Noor, N. H. H. M. (2012). Determinants of revenue efficiency in the Malaysian Islamic banking sector. Journal of King Abdul Aziz University: Islamic Economics, 25, 195-224. https://doi.org//10.4197 / Islec. 25-2.7
15 Kamarudin, F., Nordin, B. A. A., Muhammad, J., & Hamid, M. A. A. (2014). Cost, revenue and profit efficiency of Islamic and conventional banking sector: Empirical evidence from Gulf Cooperative Council countries. Global Business Review, 15, 1-24. https://doi.org/10.1177/0972150913515579   DOI
16 Staikouras, Ch., & Wood, G. (2003). The determinants of bank profitability in Europe. Proceedings of the European Applied Business Research Conference. Venice, Italy, June 9-13, 2003. https://doi.org/10.19030/iber.v3i6.3699
17 Widarjono, A., Hendrie Anto, M. B., & Fakhrunnas, F. (2020). Financing risk in indonesian islamic rural banks: Do financing products matter?. Journal of Asian Finance, Economics and Business, 7(9), 305-314. https://doi.org/10.13106/jafeb.2020.vol7.no9.305   DOI
18 Yudistira, D. (2004). Efficiency in Islamic banking: An empirical analysis of 18 banks. Islamic Economic Studies, 12(1), 1-19.
19 Kosmidou, K. (2008). The determinants of banks' profits in Greece during the period of EU financial integration. Managerial Finance, 34(3), 146-159. https://doi.org/10.1108/03074350810848036   DOI
20 Kremmling, M. D. (2011). The influence of financial sector regulation on bank performance: a study of bank performance during the world financial crisis. Aarhus School of Business and Social Sciences, Aarhus University. Retrieved March, 27, 2017.
21 Al-Lamy, H. A., Bakry, M. H., Raad, W., Al-Shami, S. A., Alaraji, Z. J., Alsa-Lihi, M. W., & Al-Tameemi, H. M. (2018). Information technology infrastructure and small medium enterprises' in Iraq. Opcion, 34(86), 1711-1724.
22 Coelli, T., Prasada, R., & Battese, G. (1998). An Introduction to Efficiency and Productivity Analysis (2nd ed.). New York, NY: Springer.
23 De Bandt, O., & Davis, E. P. (2000). Competition, contestability and market structure in European banking sectors on the eve of EMU. Journal of Banking and Finance, 24, 1045-66. https://doi.org/10.1016/S0378-4266(99)00117-X   DOI
24 Demirguc-Kunt, A., & Levine, R. (1999). Bank-based and market-based financial systems: Cross-country comparisons. Washington, DC: The World Bank. https://doi.org/10.1006/jfin.2002.0341
25 Banker, R. D., Charnes, A., & Cooper, W. W. (1984). Some models for estimating technical and scale inefficiencies in data envelopment analysis. Management Science, 30, 78-92. https://doi.org/10.1287/mnsc.30.9.1078
26 Bakri, M. H., Ali, R., & Ismail, S. (2016). Developing primary market spread and measuring financial performance of staff housing government loans. Proceedings of the 1st AAGBS International Conference on Business Management, 501-511. https://doi.org/10.1007/978-981-287-426-9_44
27 Bakri, M. H., Ali, R., & Ismail, S. (2015). The study of residential mortgage backed securities during subprime mortgage: Malaysian experience. Advanced Science Letters, 21(5), 1468-1472. https://doi.org/10.1166/asl.2015.6073   DOI
28 Bakri, M. H., Sufian, F., Baharom, A. H., & Ismail, S. (2018). Determinant of securitization spread in Malaysia. International Journal of Business and Society, 19(3), 904-917.
29 Berger, A. N., & Humphrey, D. B. (1991). The dominance of inefficiencies overscale and product mix economies in banking. Journal of Monetary Economics, 28, 117-148. https://doi.org/10.1016/0304-3932(91)90027-L   DOI
30 Berger, A. N., & Humphrey, D. B. (1997). Efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research, 98(2), 175-212. https://doi.org/10.1016/S0377-2217(96)00342-6   DOI
31 Berger, A. N., Hunter, W. C., & Timme, S. G. (1993). The efficiency of financial institutions: A review and preview of research past, present and future. Journal of Banking & Finance, 17(2-3), 221-249. https://doi.org/10.1016/0378-4266(93)90030-H   DOI
32 Berger, A. N., & Mester, L. J. (1997). Inside the black box: What explains differences in the efficiencies of financial institutions?. Journal of Banking and Finance, 21, 895-947. https://doi.org/10.1016/S0378-4266(97)00010-1   DOI
33 Bitar, M., Walker, T. J., & Pukthuanthong, K. (2015). Basel III and bank efficiency: Does one solution fit all? Evidence from Islamic and conventional banks. (May 4, 2015). https://doi.org/10.2139/ssrn.2602198.
34 Brown, K., & Skully, M. (2005). Islamic banks: A cross-country study of cost efficiency performance, accounting, commerce and finance. The Islamic Perspective Journal, 8(1-2), 43-79.
35 Chortareas, G. E., Girardone, C., & Ventouri, A. (2012). Bank supervision, regulation, and efficiency: Evidence from the European Union. Journal of Financial Stability, 8(4), 292-302. https://doi.org/10.1016/j.jfs.2011.12.001   DOI
36 Lozano-Vivas, A., & Pasiouras, F. (2010). The impact of nontraditional activities on the estimation of bank efficiency: International evidence. Journal of Banking and Finance, 34, 1436-1449. https://doi.org/10.1016/j.jbankfin.2010.01.006   DOI
37 Maudos, J., Pastor, J. M., Francisco, P., & Javier, Q. (2002). Cost and profit efficiency in European banks. Journal of International Financial Markets, Institutions and Money, 12, 33-58. https://doi.org/10.1016/S1042-4431(01)00051-8   DOI
38 Molyneux, P., & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of Banking and Finance, 16(6), 1173-1178. https://doi.org/10.1016/0378-4266(92)90065-8   DOI
39 Pasiouras F., Gaganis C., & Zopounidis C. (2006). The impact of bank regulations, supervision, market structure and bank characteristics on individual bank ratings: A cross country analysis. Review of Quantitative Finance and Accounting, 27(4), 403-438. https://doi.org/10.1007/s11156-006-0045-0   DOI
40 Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21, 222-237. https://doi.org/10.1016/j.ribaf.2006.03.007   DOI
41 Pasiouras, F. (2008). International evidence on the impact of regulations and supervision on banks' technical efficiency: An application of two-stage data envelopment analysis. Review of Quantitative Finance and Accounting, 30(2), 187-223. https://doi.org/10.1007/s11156-007-0046-7   DOI
42 Pasiouras F., Tanna S., & Zopounidis C., (2009). The impact of banking regulations on banks' cost and profit efficiency: Crosscountry evidence. International Review of Financial Analysis, 18(5), 294-302. https://doi.org/10.1016/j.irfa.2009.07.003   DOI
43 Perry, P. (1992). Do banks gain or lose from inflation. Journal of Retail Banking, 14(2), 25-40.
44 Farrell, M. J. (1957). The measurement of productive efficiency. Journal of Royal Statistical Society Association, 120, 253-281. https://doi.org/10.2307/2343100   DOI
45 Demirguc-Kunt, A., & Detragiache, E. (2002). Does deposit insurance increase banking system stability? An empirical investigation. Journal of Monetary Economics, 49(7), 1373-1406. https://doi.org/10.1016/S0304-3932(02)00171-X   DOI
46 Duong, T. T. N., Phan, H. T., Hoang, T. N., & Vo, T. T. T. (2020). The effect of financial restructuring on the overall financial performance of the commercial banks in Vietnam. Journal of Asian Finance, Economics and Business, 7(9), 75-84. https://doi.org/10.13106/jafeb.2020.vol7.no9.075   DOI
47 Eisenbeis, R. A., Ferrier, G. D., & Kwan, S. H. (1999). The informativeness of stochastic frontier and programming frontier efficiency scores: Cost efficiency and other measures of bank holding company performance. Working Paper No. 99-23. Federal Reserve Bank of Atlanta.
48 Fonseca, A. R., & Gonzalez, F. (2010). How bank capital buffers vary across countries: The influence of cost of deposits, market power and bank regulation. Journal of Banking & Finance, 34(4), 892-902. https://doi.org/10.1016/j.jbankfin.2009.09.020   DOI
49 Haron, S. (2004). Determinants of Islamic banking profitability. Global journal of Finance and Economics, 28, 314-337.
50 Hassan, M. K. (2005). The cost, profit and x-efficiency of Islamic banks. In: Economic Research Forum, 12th Annual Conference, Cairo, Egypt.
51 Ismail, S., Bakri, M. H., Ali, R., & Noor, A. M. (2014). Developing a framework of Islamic student loan-backed securitization. Procedia-Social and Behavioral Sciences, 129, 380-387. https://doi.org/10.1016/j.sbspro.2014.03.691   DOI
52 Sealey, C., & Lindley, J. T. (1977). Inputs, outputs and a theory of production and cost at depository financial institutions. The Journal of Finance, 32, 1251-1266. https://doi.org/10.1111/j.1540-6261.1977.tb03324.x   DOI
53 Sharif, S. M., Nizam, N. Z., Rashid, N. A., Masrom, N. R., & Bakri, M. H. (2018). Role of values and competencies in university intellectual property commercialization: A critical review. The Turkish Online Journal of Design, Art and Communication, 887-904. https://doi.org/10.7456/1080SSE/125   DOI
54 Hassan, M. K., & Bashir, A. H. (2005). Determinants of Islamic banking profitability. In: M. Iqbal & R. Wilson (Eds.), Islamic Perspectives on Wealth Creation, Edinburgh: Edinburgh University Press.
55 Hassan, M. K., & Hussein, K. A. (2003). Static and dynamic efficiency in the Sudanese banking system. Review of Islamic Economics, 14, 5-48.
56 Idris, N. H., Yazid, Z. A., Faique, F. A., Daud, S., Ismail, S., Bakri, M. H., & Taib, N. M. (2016). Financial literacy and debt burden among Malay youth workers in Malaysia. Advanced Science Letters, 22(12), 4288-4292. https://doi.org/10.1166/asl.2016.8130   DOI
57 Isik, I., & Hassan, M. K. (2002). Cost and profit efficiency of the Turkish banking industry: An empirical investigation. The Financial Review, 37(2), 257-280. https://doi.org/10.1111/1540-6288.00014   DOI
58 Kamarudin, F., Hue, C., Sufian, F., & Mohamad Anwar, N. (2017). Does productivity of Islamic banks endure progress or regress?. Humanomics, 33(1), 84-118. https://doi.org/10.1108/H-08-2016-0059   DOI
59 Iqbal, M. (2001). Islamic and conventional banking in the nineties: A comparative study. Islamic Economic Studies, 8, 1-27.
60 Iqbal, M., & Molyneux, P. (2005). Efficiency in Islamic banking. In: Thirty years of Islamic banking (pp. 88-104). London, UK: Palgrave Macmillan.
61 Beck, T., Demirguc-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking and Finance, 37, 433-447. https://doi.org/10.1016/j.jbankfin.2012.09.016   DOI
62 Samad, A., & M. K. Hassan (1999). The performance of malaysian Islamic bank during 1984-1997: An exploratory study. International Journal of Islamic Financial Services, 1(3), 1-14. http://dx.doi.org/10.2139/ssrn.3263331
63 Qian, J., & Strahan, P. E. (2005). How law and institutions shape financial contracts: The case of bank loans. Working Paper 11052, National Bureau of Economic Research, Inc. https://doi.org/10.1111/j.1540-6261.2007.01293.x