Capital buffer and credit‐risk adjustments in Islamic and conventional banks

Abstract

The main purpose of this article is to empirically investigate the interactions between changes in capital buffer and changes in credit risk, using panel data of Islamic and conventional banks located in the Middle East and North Africa (MENA) region over the period 1999–2016. A negative two‐way relationship between the changes in capital buffer and the changes in credit risk is found for the two types of banks, that is, banks tend to decrease their capital buffers in response to an increase in risk exposure and limit their risky activities in response to an increase in their capital buffers. Dividing our period of study into three subperiods to assess the effect of the last financial crisis 2007–08 on the adjustment process, we point out the negative bidirectional relationship between the changes in capital buffer and the changes in credit risk of the two types of banks is present for the three subperiods except the case of conventional banks during the precrisis period. Moreover, we provide evidence that Islamic banks adjust their capital buffer in response to the changes in credit risk regardless of the existence or not of a deposit insurance scheme. In contrast, the negative two‐way relationship between the changes in capital buffer and the changes in credit risk in conventional banks is found only in countries without deposit insurance schemes.

Does capital adequacy ratio influence risk-taking behaviour of conventional and Islamic banks differently? Empirical evidence from dual banking system of Malaysia

“…Furthermore, for commercial banks of India during the period between 1998 and 2012, Maji and De (2015) found similar effects of regulatory capital on banks risk, where banks risk is negatively influenced by capital limitations especially after the introduction of Basel III. Another study by Bougatef and Korbi (2019) where banks from the Middle East and North Africa (MENA) were considered over the 1999-2016 period, the association between credit risk and capital buffer was examined for both CBs and IBs. The study revealed that the two variables are negatively associated for both types of banks in a bidirectional manner: in other words, bank react to the increase in capital buffer by lower their credit risk exposure and vice versa.…”

Role of fintech in credit risk management: an analysis of Islamic banks in Indonesia, Malaysia, UAE and Pakistan

“…Islamic banks generate a significant amount of income from their credit business (Muneer et al , 2020; Shaikh et al , 2020). Contemporary research on credit risk mainly deals with its determinants or its relation with monetary policies, whether it relates to an Islamic or a conventional bank (Ali et al , 2021; Bougatef and Korbi, 2019; Dione, 2020; Rosli et al , 2019). However, there is more to credit risk in Islamic banks because when Islamic banks finance their customers, they have to deal with the issue of compliance with Shariah as well (Bougatef and Korbi, 2019; Rosli et al , 2019; Sobarsyah et al , 2020).…”

“…Islamic banking has shown its potential to stand against two major crises within a span of 12 years (Bilgin et al , 2021; Bougatef and Korbi, 2019; Rahahleh et al , 2019). The first one was the financial crisis of 2008, and the second one stemmed from the COVID-19 health crisis (Bilgin et al , 2021; Iqbal et al , 2022; Sobarsyah et al , 2020).…”

Capital Regulation and Risk-taking Behavior: Empirical Evidence for Islamic Banks

“…Lately, Bougatef and Korbi (2018) assess the interactions between changes in capital buffer and changes in credit risk of Islamic and conventional banks from the Middle East and North Africa (MENA) region for 1999-2016. Their results suggest that an increase in the changes in capital buffer has a negative effect on the changes in credit risk for the two types of banks.…”