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Article
Publication date: 24 September 2020

Aigul P. Salina, Xin Zhang and Omaima A.G. Hassan

The contribution of the banking industry to the financial crisis of 2007/8 has raised public concerns about the financial soundness of banks around the world with many…

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Abstract

Purpose

The contribution of the banking industry to the financial crisis of 2007/8 has raised public concerns about the financial soundness of banks around the world with many countries still suffering the backlogs of this crisis. The continuous emergence of such crises at both national and international levels increases governments', bank regulators' and financial market participants' need for reliable tools to assess the financial soundness of banks. In this context, this study investigates the financial soundness of the Kazakh banking sector, which is ranked by the World Bank as the first in the world in terms of the percentage of nonperforming loans (NPL) to total gross loans in 2012.

Design/methodology/approach

Using data about all Kazakh banks over the period January 01, 2008 to January 01, 2014, the study identifies a number of accounting indicators that influence the financial soundness of banks using principal component analysis (PCA). Then, it uses the outcomes of the PCA in a cluster analysis and groups the Kazakh banks into sound, risky and unsound banks at two points in time: January 01, 2008 and January 01, 2014. This methodology was further tested against a ranking system of banks and proved to be more reliable in detecting risky banks.

Findings

Fifteen financial ratios were initially selected as accounting indicators for the assessment of bank financial soundness. Using PCA, twelve indicators were isolated, which explain five principal components of capital adequacy, return on assets, profitability, asset quality, liquidity and leverage. Then using the “k-means” method, the results suggest a structure of the Kazakh banking sector on January 01, 2008 that includes two groups of banks: sound and risky banks. On January 01, 2014, this structure of the banking system has changed to include three groups of banks: sound, risky and unsound banks. Thus, in 2014 a new group of banks has emerged, i.e. financially unsound banks.

Practical implications

The proposed cluster-based methodology has proven to be a reliable tool to detect the financial soundness of Kazakh banks, which makes us advocate its employability for bank monitoring and supervision purposes.

Originality/value

This study is the first to employ a cluster-based methodology to assess the financial soundness of a banking sector. This methodology can be used at a micro-level to determine the structure of a banking sector. Also, it can be used to monitor any changes in the structure of a banking sector and provide early warning signals about the financial health of banks.

Details

Asian Journal of Accounting Research, vol. 6 no. 1
Type: Research Article
ISSN: 2443-4175

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Article
Publication date: 22 June 2021

Mushtaq Hussain Khan, Ahmad Fraz, Arshad Hassan and Syed Zohaib Hassan Kazmi

This study aims to examine whether the soundness of Islamic banks is differently affected by corruption compared to conventional counterparts. Moreover, the Shari’ah…

Abstract

Purpose

This study aims to examine whether the soundness of Islamic banks is differently affected by corruption compared to conventional counterparts. Moreover, the Shari’ah supervisory board (SSB), as a cornerstone of Islamic banking and representing a multi-layer corporate governance model, is expected to moderate the influence of corruption on soundness for Islamic banks.

Design/methodology/approach

This study considers a unique sample of 1,528 observations on 71 Islamic banks and 120 conventional banks operating in 11 emerging and developing Muslim countries over the 2010–2017 period. This study uses generalized least squares regression model and the coefficients are estimated by using random-effects estimator. In addition, to overcome a potential endogeneity concern for corruption and bank stability relationship, this study uses Two-Stage Least Squares regression instrumental variable estimator.

Findings

The authors find consistent evidence that higher levels of corruption adversely impact the soundness for conventional banks, in favor of the sand the wheel hypothesis in the corruption–development nexus. However, as expected, this study finds a less negative impact of corruption on soundness of Islamic banks. Moreover, SSB moderates the relationship between corruption and soundness of Islamic banks. The findings are robust to a battery of alternative checks.

Research limitations/implications

Findings of the paper regarding the detrimental impact of corruption on bank soundness justify the urgency of the anti-corruption campaigns in these countries, particularly for conventional banks. Moreover, the findings provide support for the positive contribution of SSBs to overcome the adverse effect of corruption on soundness of Islamic banks and thereby underscoring the need for enforcement and regulatory mechanism for SSBs to be more effective.

Originality/value

To the best of the authors’ knowledge, this is the first study to examine the moderating impact of Shari’ah supervision on the relationship between corruption and soundness of Islamic banks.

Details

Journal of Financial Crime, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1359-0790

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Article
Publication date: 10 June 2021

Afef Khalil and Imen Ben Slimene

The purpose of this paper is to examine the Board of Directors’ characteristics and their impact on the financial soundness of Islamic banks.

Abstract

Purpose

The purpose of this paper is to examine the Board of Directors’ characteristics and their impact on the financial soundness of Islamic banks.

Design/methodology/approach

Regression analysis is applied to test the impact of the Board of Directors’ characteristics on the financial soundness of Islamic banks, using a panel data set of 67 Islamic banks covering 20 countries from 2005 to 2018. The Z-score indicator is used to evaluate the Islamic bankssoundness. To check the robustness of the results, this paper uses other dependent variables (CAMEL) than the Z-score.

Findings

The main results show that the presence of an independent non-executive director negatively impacts the financial soundness of Islamic banks, while the chief executive officer duality practice has a positive effect on it. Other characteristics of the Board of Directors do not significantly impact the financial soundness of Islamic banks (foreign director, institutional director, chairman with a Shari’ah degree, interlocked chairman and the Board of Directors’ size).

Practical implications

This study aims to fill the gaps in the literature that discuss the Board of Directors’ role in corporate governance and its impact on the financial soundness of Islamic banks. In other words, it shows the role played by the Board of Directors and improves the knowledge of the corporate governance-financial soundness relationship. Plus, managers, investors and regulators may gain evocative insights, particularly those looking to improve their Islamic bankssoundness by restructuring their boards’ composition.

Originality/value

This study sheds new light on the literature on Islamic banking by clarifying the relationship between the Board of Directors and the financial soundness of Islamic banks. Contrary to previous research, this paper uses an additional hypothesis stating that a chairman with a Shari’ah degree (Fiqh Muamalt) has a positive impact on the financial soundness of Islamic banks.

Details

Corporate Governance: The International Journal of Business in Society, vol. 21 no. 7
Type: Research Article
ISSN: 1472-0701

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Book part
Publication date: 1 March 2021

Siti Khomsatun, Hilda Rossieta, Fitriany Fitriany and Mustafa Edwin Nasution

The unique characteristic of Islamic bank leads in governance and disclosure. Using stakeholder, signaling, and market discipline theory, governance and adequate…

Abstract

The unique characteristic of Islamic bank leads in governance and disclosure. Using stakeholder, signaling, and market discipline theory, governance and adequate disclosure may increase bank soundness. This study aims to investigate the relationship of sharia disclosure and Sharia Supervisory Board in influencing Islamic bank soundness in the different regulatory framework of the country. Using purposive sampling, the research covered 84 Islamic banks in 16 countries during the period 2013–2015 with lag data of Islamic bank soundness. The result shows sharia disclosure influences on Islamic bank soundness for management efficiency, capital adequacy ratio, asset quality, and liquidity. The results also show that sharia disclosure mediates the indirect effect of SSB on Islamic bank soundness. The regulatory framework (sharia accounting standard and SSB regulation) shows moderating effect of regulation framework proved on the association of sharia disclosure with management efficiency, capital, and liquidity. The effect is indirectly depending on the regulatory framework for proxy management efficiency, capital, and liquidity. The implication of the research suggests that sharia disclosure could increase the market discipline mechanism of Islamic bank stream. The Islamic bank can increase the transparency using sharia disclosure as a branding for increasing public trust, even though in the deficient Islamic bank regulation countries.

Details

Recent Developments in Asian Economics International Symposia in Economic Theory and Econometrics
Type: Book
ISBN: 978-1-83867-359-8

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Article
Publication date: 28 July 2020

Afef Khalil and Neila Boulila Taktak

The purpose of this study is to examine the relationship between corporate governance and financial soundness of Islamic banks. Precisely, this study examines the Shariah…

Abstract

Purpose

The purpose of this study is to examine the relationship between corporate governance and financial soundness of Islamic banks. Precisely, this study examines the Shariah Board’s characteristics and empirically diagnoses its impact on the financial soundness of Islamic banks.

Design/methodology/approach

In this case, the level of bank soundness is individually measured using the z-score indicator. Regression analyses are applied to test the impact of the Shariah Board’s characteristics on the financial soundness of Islamic banks, using a panel data set of 67 Islamic banks – covering 20 countries during the period 2005–2014.

Findings

The model shows that the size of the Shariah Board has a negative and significant impact on the financial soundness of Islamic banks. However, the Shariah scholar with knowledge in finance/accounting, the presence of Mufti, the interlocked Shariah scholar and the foreign Shariah scholar do not have any significant impact on the financial soundness of Islamic banks.

Practical implications

This study contributes to fill the gaps in the literature that discussed the Shariah Boards’ role in the governance of Islamic banks. In addition, it provides practical implications to the Shariah Boards’ members in the Islamic banks and calls for setting a sufficient number of scholars for each Shariah Board.

Originality/value

With this paper, the authors aim to clarify the relationship between Shariah Board and financial soundness of the Islamic banking, and provide additional insights to the emerging literature of Islamic banking. Contrary to previous research studies, the authors use an additional hypothesis, i.e. the presence of Mufti that has a positive and significant effect on the financial soundness of Islamic Banks. Methodologically, the authors incorporate a new measure to evaluate empirically the impact of Shariah Board members with knowledge of finance and accounting on the financial soundness of Islamic banks.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 9
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 28 May 2021

Hamid Kordbacheh and Seyedeh Zahra Sadati

The natural resources curse theory argues the higher dependency on natural resources leads to many socio-economic problems. The purpose of this study is to examine the…

Abstract

Purpose

The natural resources curse theory argues the higher dependency on natural resources leads to many socio-economic problems. The purpose of this study is to examine the relationship between corruption and banking soundness and also to compare the extent of this effect between the two groups of rich and poor in natural resources countries.

Design/methodology/approach

To this aim, the authors apply a panel data set comprised of 98 countries from 2012 to 2015.

Findings

The results show that nations with a higher level of corruption have poorer banking soundness. The authors also find that by considering the resource curse theory and the effect of natural resource rents in the model, the adverse impact of corruption on banking soundness is more substantial in countries with a higher natural dependency level (rich in natural resources).

Originality/value

Though studies have been conducted on corruption and banking soundness, this paper, by using resources curse theory, articulates that corruption is one of the most critical factors affecting banking soundness and has a destructive effect on the health of the banking system and the economy of almost all countries, especially in natural resource-based economies. This study will appeal to banks authorities, governments, policymakers, oversight financial institutions and those who have a vested interest in regulating financial crimes globally. They can prevent financial and banking crises by cooperating in the fight against corruption worldwide.

Details

Journal of Financial Crime, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1359-0790

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Article
Publication date: 20 July 2020

Zuhairan Yunmi Yunan

This paper aims to examine whether the level of corruption affects profitability and soundness of Islamic banking.

Abstract

Purpose

This paper aims to examine whether the level of corruption affects profitability and soundness of Islamic banking.

Design/methodology/approach

This paper uses a dynamic panel of 61 Islamic banks from 12 Organization of Islamic Cooperation (OIC) countries covering the period between 2016 and 2018.

Findings

This paper finds that the empirical evidence examined shows that corruption does affect the profitability and soundness of Islamic banks.

Originality/value

The value of this paper is to emphasize further understanding of corruption behaviour on Islamic banking in Islamic countries. This paper contributes to filling the gaps in the current literature on corruption and Islamic banking. Existing literature has only focussed on either profitability or soundness of Islamic banking, whereas this paper analyses the impact of corruption levels for both performance measurements simultaneously.

Details

Journal of Financial Crime, vol. 28 no. 1
Type: Research Article
ISSN: 1359-0790

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Article
Publication date: 8 July 2021

Afef Khalil

The purpose of the study is to examine the relationship between the board of directors (BODs) and the Shariah board (SB) and assess its impact on the financial soundness

Abstract

Purpose

The purpose of the study is to examine the relationship between the board of directors (BODs) and the Shariah board (SB) and assess its impact on the financial soundness of Islamic banks (IBs).

Design/methodology/approach

The authors use a regression model to test the effects of the relationship between the BOD and the SB on the financial soundness of IBs by applying a panel data set of 61 IBs, covering 18 countries from 2008 to 2014. The dependent variable is the Z-score indicator. To test the robustness of the results, the authors use dependent variables other than the Z-score [A rating of Capital adequacy (C), Asset quality (A), Management (M), Earnings (E), Liquidity (L), and Sensitivity (S) (CAMELS)] for 2018.

Findings

The results show that meetings between directors and SB members significantly reduce the financial soundness of IBs. The relationship between the BOD and the SB increases conflicts of interest and agency costs. However, a representation of the SB at the BOD meetings and vice versa does not affect financial soundness. The Accounting and Auditing Organization for Islamic Financial Institutions and the Islamic Financial Services Board corporate governance standards do not require the presence of the SB representative at the BOD meetings or vice versa, which justifies the results.

Practical implications

This study attempts to fill gaps in the literature by investigating the impact of meetings between the SB and the BOD on the financial soundness of IBs across the world. The results suggest that the BOD’s frequent interference in the affairs of the SB can have adverse effects on IBs and should be avoided.

Originality/value

The authors depart from the previous literature by using three new characteristics that link the BOD to the SB. Methodologically, the authors use three new measures to evaluate this relationship and its effect on the financial soundness of IBs. This study is unique because it explores the comparative impacts of the presence of a SB representative at the BOD meetings and a director at the SB meetings and meetings between the two governing boards of IBs.

Details

Journal of Islamic Accounting and Business Research, vol. 12 no. 5
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 12 January 2021

Ahmad Sahyouni, Mohammad A.A. Zaid and Mohamed Adib

The purpose of this paper is to investigate how much liquidity banks create and how liquidity creation changed over time in the MENA countries and to examine the soundness

Abstract

Purpose

The purpose of this paper is to investigate how much liquidity banks create and how liquidity creation changed over time in the MENA countries and to examine the soundness of banks in these countries based on the CAME rating system, in addition to investigating the relationship between CAME ratios and liquidity creation of these banks.

Design/methodology/approach

The study regresses the CAME ratios together with other control variables to model liquidity creation. The robustness of the results is evaluated by using a different measure of liquidity creation and by excluding the observations of the Islamic banks.

Findings

The results show that the CAME rating system, as an indicator of bank soundness, is negatively related to bank liquidity creation. Specifically, capital adequacy, management efficiency and earning ability ratios affect the on-balance sheet components of liquidity creation, while asset quality ratio affects its off-balance sheet component.

Practical implications

The paper offers insights to regulators and banks managers in terms of better understanding of the negative relationship between CAME rating system and bank liquidity creation.

Originality/value

This paper sheds more light on the relationship between bank soundness and liquidity creation by using the ratios of the CAMEL rating system as an indicator of bank strength and soundness.

Details

EuroMed Journal of Business, vol. 16 no. 1
Type: Research Article
ISSN: 1450-2194

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Article
Publication date: 25 January 2019

Maria Christina Liem

Quiet life hypothesis (QLH) states that banks with a higher market power will generate high profitability quietly, even though it could cause inefficiency. In the long…

Abstract

Purpose

Quiet life hypothesis (QLH) states that banks with a higher market power will generate high profitability quietly, even though it could cause inefficiency. In the long term, it could turn a high profitability into a lower future profitability. This paper identifies QLH-reborn through the holdinglisation strategy of the Indonesian Government to include all state-owned banks into one holding, hence increasing the market power of Indonesian state-owned banks within ASEAN. Optimum profitability and optimum efficiency are the objectives of the “holdinglisation” idea. Therefore, the purpose of this paper is to analyse the relevance of holdinglisation within the Indonesian banking industry.

Design/methodology/approach

This paper focusses on analysing the efficiency and soundness of four state-owned conventional banks and four state-owned Islamic banks in Indonesia during 2011–2015. Subsequently, this paper analyses the impact of bank effectiveness index and soundness rank on return on average asset (ROAA) and ROAE through the data panel of general least square regression using STATA.

Findings

This paper shows that all state-owned commercial banks in Indonesia during 2011–2015 are efficient and sound. Furthermore, this paper finds that market power (market share for deposit and market share for loans) has an insignificant impact on bank efficiency (BE) index, bank soundness rating, ROAA and EM. Meanwhile, BE index and BS rating have a significant impact on ROAA. Therefore, this paper concludes that holdinglisation regulation as QLH-reborn is irrelevant for Indonesian state-owned banks at this moment.

Research limitations/implications

This paper has a crucial limitation. Holdinglisation as QLH-reborn is irrelevant under the condition that all state-owned commercial banks in Indonesia are efficient and sound. Moreover, this paper contributes another actual empirical study of QLH.

Practical implications

This paper represents a scientific argumentation towards a holdinglisation strategy of state-owned commercial banks in Indonesia. Therefore, this paper could be a scientific reference for the Indonesian Government to improve Indonesian state-owned commercial banks competitiveness in ASEAN.

Originality/value

This paper is urgently needed for the Indonesian banking industry because the Indonesian Government should consider the drawbacks of holdinglisation as QLH reborn to the Indonesian banking industry, such as inefficiency and the risks of financial failure. Moreover, if the bank experiences financial failure, it could have a detrimental and lasting effect on the country’s macroeconomic condition.

Details

Managerial Finance, vol. 45 no. 2
Type: Research Article
ISSN: 0307-4358

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