Determinants of capital structure decisions among publicly listed Islamic banks

Abstract

This research aims to examine bank specific, market and regulatory determinants of leverage and capital structure based on a panel data of publicly listed Islamic banks in 12 countries over the period 2008-2017. Apart from testing standard corporate finance parameters using both OLS and M-Estimators, this study adds several idiosyncratic and regulatory environment related determinants of leverage unique to Islamic banks. The significance of potential determinants is tested for market and book leverage as well as newly introduced 'Islamic banking leverage'. Overall, the results show that Islamic banks with higher growth opportunities, tangibility, low profitability and low risk are likely to have a high leverage. Similarly, the findings suggest important role played by debt market conditions, share of investment accounts and regulatory environment in such decisions, providing an evidence of the significance of trade-off and pecking order theory in capital structure in Islamic banks. The results are more robust for market and Islamic banking leverage, rather than book leverage. The findings offer insights to regulators, standard setters and especially Islamic banks regarding parameters to strengthen their capital, enhance resilience and thus contribute to the stability of relevant financial. This paper is among the few extant studies that focus on listed Islamic banks and tests determinants based on stock market data.

Internal Determinants of Capital Structure of Islamic Banks: Evidence from the Middle East

“…The positive impact is consistent with the data of static trade-off theory, which states that large banks prefer to finance their assets with debt because they have a large ability to invest their money with a low degree of risk, and they have a large ability to provide low-cost banking services. This result is consistent with Guizani (2021), Khan et al (2021), Bukair (2019), Khokher & Alhabshi (2019), and Sheikh & Qureshi (2017).…”

“…Some studies suggested Non-Debt Tax Shield (NDTS) as a factor affecting the capital structure. Guizani (2021) and Khokher and Alhabshi (2019) found a positive impact of a Non-Debt Tax Shield on the capital structure. In contrast, Deesomsak et al (2004) and Thabet et al (2017) found a negative impact of a Non-Debt Tax Shield on the capital structure in Islamic banks.…”

“…Al-hunnayan (2020) showed a negative impact of ROA on the capital structure of Islamic banks in the GCC Region. The return on assets had no impact according to Bukair (2019) and Khokher and Alhabshi (2019). The bank's assets are divided into tangible and intangible assets.…”

“…In a different context, some studies examined the impact of the risks on the capital structure in Islamic banks. Most of the studies (Guizani, 2021;Fauziah et al 2020;Khokher & Alhabshi, 2019;Al-Harby, 2019) showed no impact of risk on a capital structure in Islamic banks. In contrast, few studies showed a negative impact of the risks on the capital structure in Islamic banks (Thabet et al, 2017;Gropp & Heider, 2010).…”

The capital structure decision of Islamic and conventional banks: empirical evidence from Malaysia

“…To mobilize funds, IBs use financing instruments including shareholders' equity and investment accounts that differ from those used by CBs. Moreover, IBs are considered to have distinct operational characteristics, risk profiles and balance sheet structures that have implications for the decision parameters of their managers (Khokher and Alhabshi, 2019). Besides, IBs are often constrained by multiple banking regulatory standards.…”