Does Islamic banks' securitization involvement restrain their financing activity?

Abstract

Purpose

The purpose of this paper is to validate the concern that banks' increasing involvement in securitization activity restrains banks' lending, as well as their degree of risk tolerance. Theoretical frameworks claim that securitization reduces risk, hence decreasing banks' degree of risk aversion. Subsequently, banks would be motivated to increase their percentage of assets devoted to risky activities, which is lending to economic sectors. However, banking statistics dictates that banks' lending is on the decline while banks' securitization activities are on the rise.

Design/methodology/approach

The paper refers specifically to the Malaysian Islamic commercial banks and utilizes standard panel data analysis.

Findings

Supportive evidence was found that banks' involvement in securitization activity do restrain their lending activity. In addition, banks tend to have a riskier portfolio composition following their involvement in securitization activity. Taken together, this signals that banks' involvement in securitization activity needs to be regulated or restricted since excessive securitization activities could curtail credit and increase risk inherent in banks' lending portfolio.

Originality/value

This study departs from previous literature in the sense that an alternative method is introduced to measure banks' securitization activity.

Citation

Hazli Zakaria, R. and Ghafar Ismail, A. (2008), "Does Islamic banks' securitization involvement restrain their financing activity?", Humanomics, Vol. 24 No. 2, pp. 95-109. https://doi.org/10.1108/08288660810876813