Cost of capital of Islamic banking institutions: an empirical study of a special case
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 4 April 2008
Abstract
Purpose
The paper's purpose is to ascertain how computing the cost of capital for Islamic banks may differ from the case of conventional ones.
Design/methodology/approach
The published accounts of four major Islamic banks were analysed, so as to test the set hypotheses. Also, two surveys were undertaken on this issue, one for banking officials; the other for depositors at a major Islamic bank.
Findings
For Islamic banks, it became clear that deposit accounts were not a liability, as these fell within the definition of “profit‐and‐loss sharing” instruments. In fact, a high‐positive correlation coefficient was apparent between an Islamic bank's market value and the size of its deposits. Also, the market value of Islamic banks was clearly independent of its cost of capital.
Research limitations/implications
The two surveys expressed the views of respondents, and these could be subjective. Also, the core sample studied in depth was limited to four banks, and this could be widened in subsequent research.
Practical implications
Risk associated with deposit‐taking needs to be looked at differently in the case of Islamic banking institutions. Also, return provided to shareholders came out higher than for depositors.
Originality/value
The paper sheds new light on how the cost of capital may be computed in the case of Islamic banks. Also, the relationship between depositors and shareholders is investigated, though additional research is required on this aspect.
Keywords
Citation
Shubber, K. and Alzafiri, E. (2008), "Cost of capital of Islamic banking institutions: an empirical study of a special case", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 1 No. 1, pp. 10-19. https://doi.org/10.1108/17538390810864223
Publisher
:Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited