Determinants of Bank Capital in Dual Banking Systems

Mohammad Bitar, M. Kabir Hassan and William J. Hippler

No 2017-WP-04, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: We report new evidence on the bank and country-level determinants of Islamic bank capital ratios in 28 countries between 1999 and 2013. Overall, we find that smaller, more profitable, and highly liquid Islamic banks are more highly capitalized. Additionally, improvements in the economic and financial environments and market discipline within a country correspond with higher Islamic bank capitalization. The results shed light on the impact that Sharia’a law restrictions have on Islamic banking capitalization. Our findings are most robust to banks that choose to hold capital well in excess of that required by regulators, consistent with traditional capital structure theory. Our results highlight the role that stable economic and political systems play in improving bank capitalization and reducing financial sector risk. By reducing political instability and corruption, improving legal systems, and encouraging access to capital markets, policymakers may incentivize mangers to make financing decisions that increase the capitalization of the Islamic banking industry in developing countries.

Keywords: Bank capitalization; Islamic banking; Institutional environment; Political distress; Market discipline; Democracy (search for similar items in EconPapers)
JEL-codes: G24 G32 K22 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2017-10
New Economics Papers: this item is included in nep-cfn and nep-rmg
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