Purpose This study aims to examine the nexus between CAMELS, risk-sharing financial performance and Islamic banks' stability. It also attempts to assess the conditioning effects of institutional quality in the relationship between risk-sharing contracts and the stability of Islamic banks. Design/methodology/approach The quantitative research design was employed using secondary data from 20 Islamic banks in six countries over the period 2007–2019. The study utilized the feasible generalized least squares method for the analysis. Findings The results indicate that not all CAMELS variables support the stability of Islamic banks. The musharakah contract induced stability of the banks, whereas mudarabah financing reduced it. The interaction between risk-sharing finance and the quality of institutions suggested that the mudarabah contract via institutional quality raises the stability of Islamic banks. On the other hand, the quality of institutions encourages the banks to offer more musharakah, but it leads to an increase in their risk-taking. We show the impact of changes in risk-sharing variables on stability amplified by institutional quality. The results were robust when alternative measures of stability were used. Practical implications Various stakeholders in banking activities could learn from the results of this study. Islamic banks could improve their positions in terms of screening for risk-sharing financing. They could also leverage more on musharakah, as it promotes stability and could generate more returns for the banks. The mudarabah financing can be improved if there is a proper evaluation of entrepreneurs. Policymakers would learn more about the importance of institutional quality, as it provides a friendly environment for both mudarabah and musharakah businesses to thrive. This could increase the participation of Islamic banks in the real economy. Originality/value Previous studies concentrated on the effects of CAMELS on the profitability of Islamic banks. This study shows that CAMELS alone might not necessarily capture the financial performance of Islamic banks. Therefore, the risk-sharing financing variables are included alongside CAMELS to determine their effects on stability. Second, unlike the past research, this study used the quality of institutions to moderate the nexus between risk-sharing financing and the stability of Islamic banks.
This study attempts to investigate the short and long-run cointegration with the causal nexus between financial developments, trade and output growth in Nigeria. The financial instability index was generated using the residual based analysis to account for the effect of financial instability on growth. To examine the cointegration effects, the study used Autoregressive Distributed Lag (ARDL) model. The non-Granger causality analysis was also employed to determine the direction of causality between the variables. We found that financial instability retards growth significantly while financial liberalization indicates positive impact, but insignificant effect on growth. The study concluded that there is a long-run nexus between financial development and economic growth in Nigeria. We recommend that proactive measures need to be established to sustain economic growth in the country through enhancing productivity level, encouraging savings culture and economizing resources to promote capital accumulation.
PurposeIslamic banks, despite being Shariah-compliant, have long been criticized for mimicking conventional banks in terms of their products and processes (Khan, 2010; Kuran, 1996). However, several Islamic banks do engage in philanthropy (zakat and charity) and risk-sharing financing (mudarabah and musharakah) instruments that better meet their raison d'etre, the fulfillment of Maqasid al-Shariah (Jatmiko et al., 2023). These contracts, however, are more susceptible to moral hazard and adverse selection problems than traditional debt-based finance (Azmat et al., 2015) and may impair Islamic bank stability. This paper explores the relationship between social finance and the stability of Islamic banks, and whether institutional quality moderates this relationship.Design/methodology/approachUsing hand-collected annual data on social finance from 12 Islamic banks in four countries: Bangladesh, Bahrain, Indonesia and Malaysia, between 2006 and 2019, the authors employ the feasible generalized least squares and the panel-corrected standard errors methods for the analysis. The Stata version 16 software was used to analyze the data for the study.FindingsThe results indicate that mudarabah and musharakah financing raises the stability of Islamic banks. The authors also found that mudarabah and musharakah expose Islamic banks to more risk-taking behavior amidst the conditioning effect of institutional quality. On the other hand, charity induces the stability of Islamic banks, while zakat increases the risk-taking behavior of the banks. Further, when the quality of institutions was used as a moderator, both zakat and charity induced the stability of Islamic banks. The results were robust when liquidity risk was used and partially robust when portfolio risks were employed as measures of stability.Research limitations/implicationsOne concern regarding the application of Islamic social finance is that it might be a risky strategy for Islamic banks. In terms of research implications, the available evidence suggests that the use of Islamic social finance instruments is not detrimental to the stability of Islamic banks. Hence, regulators and policymakers should not penalize Islamic banks for using Islamic social finance instruments that help provide financial solutions to the underserved and unserved. In terms of research limitations, the study could not include other relevant Islamic social finance instruments such as waqf and qard al-hassan. Furthermore, data availability restricts the analysis to only 12 Islamic banks in fourcountries. As more Islamic banks in different countries venture into Islamic social finance, and the quantity and quality of information improve, future studies could explore the issue further.Social implicationsThe available evidence suggests that the use of Islamic social finance instruments does not worsen the stability of Islamic banks. Given the dominance of sale- and lease-based contracts in Islamic financing (Aggarwal and Yousef, 2000; Šeho et al., 2020), these findings should encourage other Islamic banks to provide financial solutions using other Shariah-compliant contracts including those based on risk-sharing and philanthropy. This would be a better reflection of the Islamic banks’ value proposition as it helps boost social activities that have a high impact on the activities of small businesses, contributing to the real economy and promoting well-being in society.Originality/valuePrevious studies mainly relied on mudarabah, mushakarah and zakat separately as they relate to the performance of Islamic banks. This study explores the impact of social finance which includes charity and zakat to examine their impact on Islamic banks’ stability. Further, the authors use institutional quality as a moderating variable in the relationship between Islamic social finance instruments and the stability of Islamic banks.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-06-2022-0441
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