The risk-capital-efficiency trilogy: A comparative study between Islamic and conventional banks

Abstract

Purpose

Based on a matched sample of 34 Islamic banks and 89 conventional ones, the purpose of this paper is to analyze and compare the risk-capital-efficiency interconnection.

Design/methodology/approach

Based on the triple square model (3SLS), two major risk measures have been accounted for, namely, the ratio of non-performing loans to total loans (credit risk) and the z-score indicator (risk insolvency). In addition, certain bank-specific factors as well as macroeconomic ones have also been considered in the model.

Findings

The reached results appear to reveal that the best capitalized Western banks turn out to be more engaged in an excessive risk-taking behavior, resulting in increased toxic-loan ratios and, simultaneously, a rather shaken stability. Concerning Islamic banks, cost efficiency has proven to have a negative and significant effect on NPLs. However, the capital, technical efficiency, competitiveness and macroeconomic factors turn out to have a significant and positive effect on Islamic banks’ insolvency risk, thus helping promote these banks’ stability.

Originality/value

In addition to the enrichment of literature regarding dual-banking systems, the authors hope the present work would provide a modest contribution to the regulators belonging to the MENA region and Asia with useful results. In particular, the authors recommend developing some management and monitoring tools whereby the risk-taking behavior of highly capitalized conventional banks could be moderated. As a matter of fact, special attention should be paid to the agency problems prevalent within Islamic financial institutions, particularly the best capitalized ones.

Citation

Louati, S., Louhichi, A. and Boujelbene, Y. (2016), "The risk-capital-efficiency trilogy: A comparative study between Islamic and conventional banks", Managerial Finance, Vol. 42 No. 12, pp. 1226-1252. https://doi.org/10.1108/MF-01-2016-0009