Challenges in implementing capital adequacy guidelines to Islamic banks

Ariss, Rima Turk; Sarieddine, Yolla

doi:10.1057/palgrave.jbr.2350059

Cited by 51 publications

(34 citation statements)

References 1 publication

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“…On the one hand, under Islamic banking principles a number of depositors supply investment accounts and participate in the bank investment activities through risk-sharing schemes, thus, in principle, requiring less protection than conventional bank depositors (Ariss and Sarieddine, 2007). On the other hand, the possibility of shifting risks on depositors raises the risk of moral hazard, so that all investors should look for a higher degree of safekeeping.…”

Section: Discussionmentioning

confidence: 99%

Does capitalization enhance efficient risk undertaking?

Pellegrina

2012

Accounting Research Journal

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If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -In light of the current debate on bank capital requirements, the purpose of this paper is to investigate the relative impact of capitalization on risk-taking efficiency in Islamic and conventional banks. The author tests whether changes occurring to the capital structure of such different types of intermediaries unevenly affect their behaviour in terms of risk-taking efficiency. Design/methodology/approach -The paper conducts an empirical analysis using data for the period 2001-2011 by means of both standard regression methods and stochastic cost frontier techniques. Findings -Results provide evidence that more capitalized Islamic banks are associated to less risky positions in terms of their asset structure. In particular, the latter exhibit higher liquidity standards and a lower incidence of non-performing loans compared to other banks. This has delayed positive effects on profitability and no substantial impact on efficiency. On the other hand, highly capitalized conventional banks tend to shift from more traditional lending activities to investment in other (profit generating) assets. Such strategy increases profitability and efficiency, although raising impaired loans.Research limitations/implications -This study does not address potential endogeneity concerns that might affect the variables at stake, hence mainly providing indications in terms of correlation between phenomena rather than causality. Practical implications -The analysis has important practical implications when considering capital adequacy as a regulatory tool for managing the risk of Islamic banks' activity, following principles similar to those recommended by the Basel committee. Originality/value -The original contribution of the paper to the literature consists of comparing the effects of capitalization in different types of banks, and results can be usefully exploited by policymakers wishing to tailor banking regulation on the specific model of banking they are entitled to regulate.

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Section: Discussionmentioning

confidence: 99%

Does capitalization enhance efficient risk undertaking?

Pellegrina

2012

Accounting Research Journal

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“…With regard to the literature on Islamic banking, some theoretical research studies (e.g., Ariss & Sarieddine, ; Karim, ) argue capital adequacy requirements may be irrelevant to Islamic banks, proposing other methods to calculate the adequate capital. Others (e.g., Errico & Farahbaksh, ; Hassan & Dicle, ) demonstrate Islamic banks can follow the international standards that apply to conventional banks.…”

Section: Literature Reviewmentioning

confidence: 99%

“…He concludes regulatory authorities would have to use an adjusted framework in addition to that of Basle to deal with the specificity of PSIAs. Ariss and Sarieddine () show the Pillar I of the Basel II Accord may be not relevant to Islamic banks because their depositors participate in the bank investment activities through risk‐sharing schemes. They recommend a new regulatory body for Islamic banks should take into account the Sharia compliance risk because Islamic financing and investing activities differ across Islamic financial institutions or across countries.…”

Section: Literature Reviewmentioning

confidence: 99%

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

Bougatef

Korbi²

2018

Thunderbird Intl Bus Rev

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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.

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“…But these standards are still at evolutionary stage as Muljawan, Dar, and Hall (2004) have critically evaluated the capital adequacy frame work defined by AAOIFI for IFI and raised some serious issues on established standards, they also proposed new frame after analysing the criticism of proposed framework. Ariss and Sarieddine (2007) studied the implications of Pillar 1 of the Basel II accord to Islamic banks following the IFSB and the AAOIFI guidelines, and recommended proposals for developing a capital adequacy framework that better accounts for Islamic banks activities. Similarly Archer, Karim and Sundararajan (2010) established a quantitative analytical framework for the exercise of supervisory discretion on "alpha" to assess the adequacy of Islamic banks capital.…”

Section: Regulatory Capital Requirementmentioning

confidence: 99%