The impact of corruption on the soundness of Islamic banks

Abstract

Islamic banking is developing rapidly around the world and is increasingly recognized as a viable alternative mode of financing especially these last years when capitalism has shown its limits and weaknesses. However, this astronomical growth of banking and Islamic finance was associated with a high level of corruption that plagues many Muslim countries. This ailment of corruption can deter Islamic banking to be a better effective and meaningful pathway for poverty reduction and economic development. The purpose of this paper is to investigate the impact of corruption on the soundness of Islamic banks (IBs). Using a panel of 69 IBs over the period 2008-2010, we provide robust evidence that the corruption level aggravates the problem of impaired financing. JEL Classification G21 Z12 C33 AbstractIslamic banking is developing rapidly around the world and is increasingly recognized as a viable alternative mode of financing especially these last years when capitalism has shown its limits and weaknesses. However, this astronomical growth of banking and Islamic finance was associated with a high level of corruption that plagues many Muslim countries. This ailment of corruption can deter Islamic banking to be a better effective and meaningful pathway for poverty reduction and economic development. The purpose of this paper is to investigate the impact of corruption on the soundness of Islamic banks (IBs). Using a panel of 69 IBs over the period 2008-2010, we provide robust evidence that the corruption level aggravates the problem of impaired financing. JEL Classification

Corruption and the soundness of banking systems in middle-income countries

“…The extension of the time window and the use of panel regression method as in our paper not only aid in the findings regarding long-term impact of the regressors, but also provide more robust results in comparison with Park (2012) which only employs pooled OLS [4]. Our paper also expands the scope of Bougatef (2015), for this paper only specializes in Islamic banks while credit risk preferences and tolerance may differ significantly between Islamic banks and conventional banks [7]. Finally, several implications for policymakers in middle-income countries are suggested to harness the likely effects of corruption on the soundness of banking systems.…”

“…Corruption causes projects to need more capital than other projects, leading to a decline in the quality of private investments and lowering the ability to make payment of loans. Bougatef (2015) provide evidence that the corruption level aggravates the problem of impaired financing. This in general affects the soundness of banking activities and economic growth.…”

“…This in general affects the soundness of banking activities and economic growth. In other words, banks are a channel that transfer the impact of corruption on economic growth (Park, 2012) [4,7].…”

“…We collect research data comprising 102 middle-income countries in 6 (1) Where Yi is the dependent variable that measures the soundness levels of banks. We use the ratio of overdue debt/total outstanding loans (Park, 2012, Bougatef, 2015 or non-performing loan ratio (NPL) [4,7]. The loan quality (asset quality of banks) plays an important role in assessing a bank's financial health as lending activity is considered its core activity (Park, 2012) [4].…”

Shariah Risk: Its Origin, Definition, and Application in Islamic Finance

“…Many researchers highlight the third systematic discussion; among them are Elgari (2003), Dusuki and Smolo (2009), Ismail and Ahmad (2010), Abdullah, Shahimi, andIsmail (2011), andBougatef (2015). They have defined risks based on the principles of jurisprudence (qawa'id fiqhiyyah).…”