Regulation of Islamic banks: Basel III capital framework and profit-sharing investment accounts
Kévin Spinassou () and
Leo Indra Wardhana
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Kévin Spinassou: LC2S - Laboratoire caribéen de sciences sociales - CNRS - Centre National de la Recherche Scientifique - UA - Université des Antilles
Leo Indra Wardhana: Universitas Gadjah Mada
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This paper theoretically examines the impact of capital requirements on Islamic banks. Given the large use of profit-sharing investment accounts (PSIA) in Islamic banking and the recent implementation of Basel III capital framework, we develop a simple model where banks are able to offer PSIA contracts under a regulation applying risk-weighted capital ratios and leverage ratio restrictions. We find that banks with high or low returns on assets prefer " conventional " banking, while banks with intermediate returns on assets operate as Islamic banks, by selecting PSIA instead of deposits. We further highlight that capital requirements tend to increase this incentive to opt for Islamic banking, especially when Islamic banks benefit from a less competitive environment and from a locally tailored capital regulation.
Keywords: profit-sharing investment accounts; bank capital regulation; Islamic finance; profit- sharing investment accounts; Basel III; banking capital requirements; IFSB (search for similar items in EconPapers)
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