Examining the relationship between bank stability and earnings quality in Islamic and conventional banks
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 6 August 2020
Issue publication date: 1 November 2020
Abstract
Purpose
The purpose of this paper is to investigate the effect of earnings quality on banking stability in Gulf Cooperation Council countries. First, the author isolates the discretionary loan loss provision (DLLP) to investigate the impact of total LLP, DLLP, discretionary accruals and a small positive variation in net income on bank stability. Second, the author investigates differences that may exist between Islamic banks (IBs) and conventional banks (CBs) in terms of the impact of DLLP on bank stability.
Design/methodology/approach
This research is based on unbalanced panel data for 39 IBs and 64 CBs in the six Gulf Cooperation Council countries over the 2000–2014 period.
Findings
The findings indicate that the extent of stability is negatively associated with the level of DLLP. This study also found significant differences between the two banking sectors in the effect of DLLP on bank stability.
Practical implications
This study has various practical implications. First, it provides insights for governments and regulators about introducing instruments like borrower restrictions and dynamic provisions to reduce LLP, because it negatively affects banking stability. Second, bankers should carefully assess the effects of their LLP strategies to overcome any negative effects. Third, the findings are also relevant to shareholders, investors and bank customers. More specifically, the results will help to improving their understanding of how LLP is not a financial strength and it is subject to managers’ opportunism that can lead to a financial instability. Finally, this study’s results encourage researchers to investigate an unexplored question, namely, the procyclicality of LLP and its determinants and effects.
Originality/value
To the best of the author’s knowledge, this is the first study to investigate differences that may exist between Islamic and CBs in terms of the impact of DLLP on bank stability.
Keywords
Acknowledgements
The author would like to thank Professor Abdelwahed Omri, Professor Mounira Ben Arab and Dr Karim Garrouch for their helpful comments and suggestions that enabled us to improve the quality of this paper considerably, appreciate the helpful comments and suggestions of the two anonymous referees. Any errors remain the author’s own. The author is very grateful to the editor of International Journal of Islamic and Middle Eastern Finance and Management, Hassan, M. Kabir.
Citation
Riahi, Y. (2020), "Examining the relationship between bank stability and earnings quality in Islamic and conventional banks", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 13 No. 5, pp. 803-826. https://doi.org/10.1108/IMEFM-10-2018-0328
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited