Post by atumdjeheuty on May 29, 2015 2:31:59 GMT 4
Will Islamic Banking Make the World Less Risky? An Empirical Analysis of Capital Structure, Risk Shifting and Financial Stability
Moazzam Farooq
Tilburg University - CentER, European Banking Center (EBC); Central Bank of Oman; State Bank of Pakistan; Iqra University; International Monetary Fund (IMF)
Sweder Van Wijnbergen
Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Sajjad Zaheer
University of Amsterdam; Central Bank of Oman; State Bank of Pakistan; Iqra University; International Monetary Fund (IMF)
April 24, 2015
Tinbergen Institute Discussion Paper 15-051/VI/DSF92
Abstract:
We use a classic Merton credit risk framework to argue that Islamic Banking Institutions (IBIs) face less incentive to take on risks than Conventional Banking Institutions (CBI). IBIs have less incentive for risk shifting both in and outside of distress situations. We test and confirm this prediction in an empirical analysis based on a dataset covering all CBIs, IBIs, and Islamic and conventional subsidiaries of mixed banking institutions in Pakistan. We find that full-fledged Islamic banks (IBs) are indeed more stable than conventional banking institutions (CBIs), and are better capitalized than their conventional counterparts. IBIs also have less volatile asset returns, less non-performing loans (NPLs) and lower loan loss provisioning. Similar results obtain for Islamic windows of mixed banks compared with conventional windows. The analysis suggests that the loss absorption capacity of Islamic banks leads to less risk taking and a more stable banking system.
Number of Pages in PDF File: 34
papers.ssrn.com/sol3/papers.cfm?abstract_id=2605358