Determinants of banks’ risk-taking behavior, stability and profitability: evidence from GCC countries

Abstract

Purpose

This paper aims to examine the effect of bank-specific, financial structure and macroeconomic factors on the risk-taking behavior, stability and profitability of banks in Gulf Cooperation Council (GCC) economies during 1998–2017.

Design/methodology/approach

The authors use a two-step system generalized method of moments dynamic model to analyze the data.

Findings

The results show that non-traditional activities increase the risk and decrease the stability and profitability of banks that are highly capitalized, highly liquid and large. Banks in this group are less engaged in securities investments and their higher degree of loan exposure leads to a decrease in risk and an increase in their stability and profitability. Higher concentration increases the risk and decreases the stability and profitability of banks that are less capitalized, less liquid and small. Banks with a higher share of non-traditional activities are riskier and less stable and less profitable before the financial crisis. The study finds that banks with relatively higher capitalization and high lending growth rates are riskier, profitable and less stable during the crisis. Larger commercial banks are less risky and more stable and profitable than smaller banks before the global financial crisis. Islamic banks performed better in terms of fee income, capitalization, liquidity, asset quality and have higher market concentration than conventional banks.

Originality/value

The study provides the first comprehensive empirical evidence on the drivers of risk-taking behavior, stability and profitability of the GCC banks. It also investigates the differences across these variables based on the characteristics of financial strength such as capitalization, liquidity and size; before, during and after the financial crisis; and differences between Islamic and conventional banks.

Citation

Saif-Alyousfi, A.Y.H. and Saha, A. (2021), "Determinants of banks’ risk-taking behavior, stability and profitability: evidence from GCC countries", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 14 No. 5, pp. 874-907. https://doi.org/10.1108/IMEFM-03-2019-0129