Creditor rights and bank capital decisions: Conventional vs. Islamic banking

Mohammad Bitar and Amine Tarazi

Journal of Corporate Finance, 2019, vol. 55, issue C, 69-104

Abstract: Using a sample of banks operating in 24 countries, we provide robust evidence that stronger creditor rights are associated with higher capital adequacy ratios for conventional banks but not for Islamic banks. Such results suggest that, under stronger creditor protection, only the managers of conventional banks increase equity, presumably as a means of signalling better monitoring efforts and of avoiding loss of control. A possible reason for the finding that Islamic banks do not generally increase equity is that, under the profit loss sharing (PLS) principle, depositors share profits and losses with the bank. The role of creditor protection is hence irrelevant in an Islamic banking context. However, we show that in predominantly non-Muslim countries with less competitive markets, Islamic banks show a similar association between creditor rights and capital ratios as conventional banks.

Keywords: Creditor rights; Market power; Religion; Bank capital ratios; Islamic banks (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 K22 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (27)

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Related works:
Working Paper: Creditor rights and bank capital decisions: Conventional vs. Islamic banking (2019)
Working Paper: Creditor rights and bank capital decisions: Conventional vs. Islamic banking (2019)
Working Paper: Creditor rights and bank capital decisions: Conventional vs. Islamic banking (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:55:y:2019:i:c:p:69-104

DOI: 10.1016/j.jcorpfin.2018.11.007

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