Browse > Article
http://dx.doi.org/10.13106/jafeb.2021.vol8.no1.841

Bank Capital, Efficiency and Risk: Evidence from Islamic Banks  

ISNURHADI, Isnurhadi (Department of Management, Faculty of Economics, Universitas Sriwijaya)
ADAM, Mohamad (Department of Management, Faculty of Economics, Universitas Sriwijaya)
SULASTRI, Sulastri (Department of Management, Faculty of Economics, Universitas Sriwijaya)
ANDRIANA, Isni (Department of Management, Faculty of Economics, Universitas Sriwijaya)
MUIZZUDDIN, Muizzuddin (Department of Management, Faculty of Economics, Universitas Sriwijaya)
Publication Information
The Journal of Asian Finance, Economics and Business / v.8, no.1, 2021 , pp. 841-850 More about this Journal
Abstract
This study aims to evaluate the relationship between bank capital, efficiency, and risk in Islamic banks. We use data from 129 Islamic banks in the world, retrieved from various data sources. We retrieved specific banking data from Moody's Analytics BankFocus and Thomson Reuters Eikon, while data at the country level was obtained from the World Bank website. This study uses various estimates both Pooled OLS (Ordinary Least Square) and Random Effect (RE). However, to overcome the issue of serial correlation which could cause bias in the results of the study, we used fixed-effect (FE) cluster estimates. The research results confirm the previous findings that bank capital positively affects bank stability (natural logarithm of Z-Score) and negatively affects credit risk (loan loss provision to total liabilities). The findings also show that efficiency has the same effect. The interaction test of bank capital and efficiency shows that efficiency encourages banks to reduce risk, including when bank capital is relatively lower. This finding is expected to have implications for the authorities to boost bank efficiency in addition to establishing several regulations related to capital. The efficiency implemented by the bank will encourage banks to act prudently so that the bank can maintain its performance through risk mitigation.
Keywords
Capital; Efficiency; Bank Risk; Islamic Bank;
Citations & Related Records
연도 인용수 순위
  • Reference
1 Abedifar, P., Molyneux, P., & Tarazi, A. (2013). Risk in Islamic banking. Review of Finance, 17(6), 2035-2096. https://doi.org/10.1093/rof/rfs041   DOI
2 Anginer, D., Demirguc-Kunt, A., Huizinga, H., & Ma, K. (2018). Corporate governance of banks and financial stability. Journal of Financial Economics, 130(2), 327-346. https://doi.org/10.1016/j.jfineco.2018.06.011   DOI
3 Anginer, D., Demirguc-Kunt, A., & Mare, D. S. (2018). Bank capital, institutional environment, and systemic stability. Journal of Financial Stability, 37, 97-106. https://doi.org/10.1016/j.jfs.2018.06.001   DOI
4 Barth, J., Caprio, G., & Levine, R. (2004). Bank regulation and supervision: What works best. Journal of Financial Intermediation, 13(2), 205-248. https://doi.org/10.1016/j.jfi.2003.06.002   DOI
5 Beck, T., De Jhonge, & O. Scheppens, G. (2013). Bank competition and stability: Cross-country heterogeneity. Journal of Financial Intermediation, 22(2), 218-244. https://doi.org/10.1016/j.jfi.2012.07.001   DOI
6 Berger, A. N. (1993). The efficiency of financial institutions: A review and preview of research past, present, and future. Journal of Banking and Finance, 17(2-3), 29. https://EconPapers.repec.org/RePEc:eee:jbfina:v:17:y:1993:i:2-3:p:221-249
7 Berger, A. N., & DeYoung, R. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking & Finance, 21(6), 22. https://www.federalreserve.gov/pubs/feds/1997/199708/199708pap.pdf
8 Hassan, M. K., & Aliyu, S. (2018). A contemporary survey of Islamic banking literature. Journal of Financial Stability, 34, 12-43. https://doi.org/10.1016/j.jfs.2017.11.006   DOI
9 Hellmann, T. F., Murdock, K. C., & Stiglitz, J. E. (2000). Liberalization, moral hazard in banking, and prudential regulation: Are capital requirements enough? The American Economic Review, 90(1), 20. https://doi.org/10.1257/aer.90.1.147   DOI
10 Hoechle, D. (2007). Robust standard errors for panel regressions with cross-sectional dependence. Stata Journal, 7(3), 281-312.   DOI
11 Hughes, J. P., & Mester, L. J. (1998). Bank capitalization and cost: evidence of scale economies in risk management and signaling. Review of Economics and Statistics, 80(2), 15. https://EconPapers.repec.org/RePEc:tpr:restat:v:80:y:1998:i:2:p:314-325   DOI
12 Ibrahim, M. (2019). Capital regulation and Islamic banking performance: A panel evidence. Buletin Ekonomi Moneter dan Perbankan, 22(1), 47-68. https://doi.org/10.21098/bemp.v22i1.1029   DOI
13 Islamic Finance Development Indicator (IFDI). (2018). Islamic Finance Development (IFD) Report 2018. Retrieved from http://www.bitly/IFDatabaase
14 Kabir, M. N., & Worthington, A. C. (2017). The 'competition-stability/fragility' nexus: A comparative analysis of Islamic and conventional banks. International Review of Financial Analysis, 50, 111-128. https://doi.org/10.1016/j.irfa.2017.02.006   DOI
15 Keeley, M. C. (1990). Deposit insurance, risk, and market power in banking. The American Economic Review, 40(50), 19. https://www.jstor.org/stable/2006769
16 Risfandy, T., Tarazi, A., & Trinugroho, I. (2020). Competition in dual markets: Implications for banking system stability. Global Finance Journal. https://doi.org/10.1016/j.gfj.2020.100579   DOI
17 Qayyum, N. U., & Noreen, U. (2019). Impact of capital structure on profitability: A comparative study of Islamic and Conventional Banks of Pakistan. The Journal of Asian Finance, Economics, and Business, 6(4), 65-74. https://doi.org/10.13106/jafeb.2019.vol6.no4.65   DOI
18 Rahman, M. M., Chowdhury, A. A., & Dey, M. (2018). Relationship between risk-taking, capital regulation, and bank performance: Empirical evidence from Bangladesh. Eurasian Journal of Business and Economics, 11(22), 29-57. https://doi.org/10.17015/ejbe.2018.022.02   DOI
19 Repullo, R., & Suarez, J. (2013). The procyclical effects of bank capital regulation. Review of Financial Studies, 26(2), 452-490. https://www.cemfi.es/-suarez/repullo-suarez09.pdf   DOI
20 Rizvi, S. A. R., Narayan, P. K., Sakti, A., & Syarifuddin, F. (2020). Role of Islamic banks in the Indonesian banking industry: An empirical exploration. Pacific-Basin Finance Journal, 62(C),1-10. https://doi.org/10.1016/j.pacfin.2019.02.002   DOI
21 Setiyono, B., & Tarazi, A. (2014). Disclosure, ownership structure, and bank risk: Evidence from Asia. Paper presented at the 27th Australasian Finance and Banking Conference, Sydney.
22 Soedarmono, W., Machrouh, F., & Tarazi, A. (2013). Bank competition, crisis, and risk-taking: Evidence from emerging markets in Asia. Journal of International Financial Markets, Institutions, and Money, 23, 196-221. https://doi.org/10.1016/j.intfin.2012.09.009   DOI
23 Tan, Y., & Floros, C. (2013). Risk, capital, and efficiency in Chinese banking. Journal of International Financial Markets, Institutions, and Money, 26, 378-393. https://doi.org/10.1016/j.intfin.2013.07.009   DOI
24 Calem, P., & Rob, R. (1999). The impact of capital-based regulation on bank risk-taking. Journal of Financial Intermediation, 8(4), 317-352. https://doi.org/10.1006/jfin.1999.0276   DOI
25 Berger, A. N., & Humphrey, D. B. (1997). The efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research, 98(2): 175-212. https://dx.doi.org/10.2139/ssrn.2140   DOI
26 Berger, A. N., Klapper, L. F., & Turk-Ariss, R. (2009). Bank Competition and Financial Stability. Journal of Financial Services Research, 35(2), 99-118. https://doi.org/10.1007/s10693-008-0050-7   DOI
27 Bitar, M., Pukthuanthong, K., & Walker, T. (2019). Efficiency in Islamic vs. conventional banking: The role of capital and liquidity. Global Finance Journal, 19, 100487. https://doi.org/10.1016/j.gfj.2019.100487   DOI
28 Cihak, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2-3), 95-113. https://doi.org/10.1007/s10693-010-0089-0   DOI
29 Danisman, G. O., & Demirel, P. (2019). Bank risk-taking in developed countries: The influence of market power and bank regulations. Journal of International Financial Markets, Institutions, and Money, 59, 202-217. https://doi.org/10.1016/j.intfin.2018.12.007   DOI
30 DeYoung, R., Distinguin, I., & Tarazi, A. (2018). The joint regulation of bank liquidity and bank capital. Journal of Financial Intermediation, 34, 32-46. https://doi.org/10.1016/j.jfi.2018.01.006   DOI
31 Fiordelisi, F., Marques-Ibanez, D., & Molyneux, P. (2011). Efficiency and risk in European banking. Journal of Banking & Finance, 35(5), 1315-1326. https://doi.org/10.1016/j.jbankfin.2010.10.005   DOI
32 Maswadeh, S. N. (2020). How investment deposits at Islamic and conventional banks affect earnings per share? The Journal of Asian Finance, Economics, and Business, 7(11), 669-677. https://doi.org/10.13106/jafeb.2020.vol7.no11.669   DOI
33 Lee, T. H., & Chih, S. H. (2013). Does financial regulation affect the profit efficiency and risk of banks? Evidence from China's commercial banks. The North American Journal of Economics and Finance, 26, 705-724. https://doi.org/10.1016/j.najef.2013.05.005   DOI
34 Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking & Finance, 32(8), 1452-1467. https;//doi.org/10.1016/j.jbankfin.2007.12.002   DOI
35 Marcus, A. J. (1984). Deregulation and bank financial policy. Journal of Banking & Finance, 8(4), 557-565. https://doi.org/10.1016/S0378-4266(84)80046-1   DOI
36 Meslier, C., Risfandy, T., & Tarazi, A. (2017). Dual market competition and deposit rate setting in Islamic and conventional banks. Economic Modelling, 63, 318-333. https://doi.org/10.1016/j.econmod.2017.02.013   DOI
37 Mohd Noor, N. H. H., Bakri, M. H., Wan Yusof, W. Y. R., Mohd Noor, N. R. A., & Zainal, N. (2020). The impact of the bank regulation and supervision on the efficiency of Islamic banks. The Journal of Asian Finance, Economics, and Business, 7(11), 747-757. https://doi.org/10.13106/jafeb.2020.vol7.no11.747   DOI
38 Muizzuddin, M., & Isnurhadi, I. (2013). Islamic banking efficiency: Two-stage data envelopment analysis. Paper presented at the 8th International Conference on Business and Management (ICMBR), Seoul. http://repository.unsri.ac.id/25178/1/Muiz-Isnurhadi-ICBMR_2013.pdf
39 Trinugroho, I., Risfandy, T., & Ariefianto, M. D. (2018). Competition, diversification, and bank margins: Evidence from Indonesian Islamic rural banks. Borsa Istanbul Review, 18(4), 349-358. https://doi.org/10.1016/j.bir.2018.07.006   DOI
40 Thakor, A. V. (2014). Bank capital and financial stability: An economic trade-off or a Faustian bargain? Annual Review of Financial Economics, 6(1), 185-223. https://doi.org/10.1146/annurev-financial-110613-034531   DOI
41 Williams, J. (2004). Determining management behavior in European banking. Journal of Banking & Finance, 28(10), 2427-2460. https://doi.org/10.1016/j.jbankfin.2003.09.010   DOI