Capital Adequacy in Conventional Versus Islamic Banks According to Basel III and Islamic Accounting Standards and Its Impact on Financial Stability: Empirical Evidence from the Kingdom of Saudi Arabia

Nahla Mohamad El Sayed Ibrahim, Mahmoud Mohamed Elsayed Ibrahim and Mohamed Abd Elmoneim Abou ElSoud Zaied

Chapter 18 in Islamic Accounting and Finance:A Handbook, 2023, pp 515-553 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This study aims to compare capital adequacy and financial stability in Islamic and conventional Saudi banks and investigate the impact of capital adequacy on the financial stability of a bank. Our study uses the annual data of five conventional banks and four Islamic banks listed on the Saudi Stock Exchange for the period 2016–2020. The Z-score has been computed and used as the measure of the stability of listed Saudi Islamic and conventional banks for the period 2016–2020. This study uses ordinary least square regression to investigate the impact of capital adequacy on the financial stability of banks. The researchers adopt the development of research hypotheses in the light of the theory of stakeholders and the foundations of Islamic law. The findings indicated that, first, there are significant differences in the capital adequacy ratio between conventional and Islamic banks. This difference is due to the increase in the mean capital adequacy ratio of Islamic banks over conventional banks. Second, our result found significant differences in financial stability between conventional and Islamic banks. This difference is due to the increase in the mean of the Z-score for Islamic banks over conventional banks. Third, our result refers to significant negative impacts of capital adequacy ratio on financial stability. Our study applied to listed Saudi banks from 2016 to 2020. The empirical results of our study are very useful for supervisors, banks management, investors, bank customers, and policymakers. The results contribute to knowing the unexpected negative effects of increased capital adequacy and its negative impact on the bank’s profits and the threat to financial stability, in addition to knowing the main indicators of capital adequacy and financial stability for Islamic and conventional banks in a way that helps bank supervisors, policymakers, and investors in rationalizing. Their decisions are specific to both Islamic and conventional banks, in addition to identifying the factors that help to enhance the financial stability process. This study is among a few studies that provide empirical evidence for the claim that the increase in capital adequacy rates is always one of the positive indicators to achieve financial stability, in addition to the great role of Islamic banks in achieving this. The study found a rejection of the validity of this claim and reached unexpected results.

Keywords: Islamic Accounting; Islamic Finance; Islamic Banking; AAOIFI (search for similar items in EconPapers)
JEL-codes: G34 M41 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9781800612426_0018 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9781800612426_0018 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9781800612426_0018

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().