Measuring the determinants of capital adequacy and its impact on efficiency in the banking industry : a comparative analysis of Islamic and conventional banks

Mohammed, Abdul-hussein Jasim (2018) Measuring the determinants of capital adequacy and its impact on efficiency in the banking industry : a comparative analysis of Islamic and conventional banks. PhD thesis, University of Bolton.

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Abstract

In terms of profit maximization, being efficient, is one of the key concerns of banks, the regulators are more concerned with setting the most appropriate policies and standards to optimize their role in achieving financial stability in the market. More precisely, capital adequacy standards are among the top priorities of the regulators in the banking sector. In addition, due to the unique nature of Islamic financial principles, the Islamic banks face different challenges when it comes to capital requirements and bank efficiency related issues compared to conventional banks. Therefore, this research aims to examine capital adequacy requirements and measure the key factors that may have an impact. Furthermore, this research assesses the impact of the capital adequacy requirements on the efficiency of Islamic and conventional banks in the case of the Gulf Cooperation Council (GCC) region. Following the existing literature related to banking, this study developed two regression models; the first one was applied to examine the determinants of the capital adequacy ratio. The Data Envelopment Analysis (DEA) was used to investigate the level of efficiency, and then, the second regression model was used to examine the relationship between the capital adequacy ratio and the efficiency of the banks. The examined data are obtained from 50 banks, 25 Islamic banks and 25 conventional banks, in the GCC countries over the period between 2006 and 2015. The overall results are consistent with most of the developed hypotheses indicating that liquidity has a significant negative effect on the capital adequacy of Islamic and conventional banks. The results also confirmed that credit risk has a significant positive effect on the capital adequacy of Islamic and conventional banks. Furthermore, the results confirmed that bank profitability has a significant positive effect on the capital adequacy of Islamic and conventional banks together. Net interest income remains an insignificant association with the capital adequacy requirements of the examined banks. The results confirmed that management quality stays in a positive significant association with capital adequacy requirements in the case of both Islamic and conventional banks in the GCC region over the period between 2006 and 2015. Based on the results delivered through the DEA method, the empirical results reveal that the efficiency of Islamic banks are less efficient than conventional banks in the GCC region. Such results could be due to the unique nature of the Islamic financial principles that impose more complexity to the Islamic financial products and operations that in turn leads to lower efficiency compared to the conventional banks. The empirical results, consistent with the developed hypothesis, reveal that the capital adequacy negatively affects the banks efficiency of the examined GCC banks. However, the results show that such effect is lower in the case of the Islamic banks compared to the conventional banks. The obtained result could be due to financial operations that are based on Islamic financial principles.

Item Type: Thesis (PhD)
Additional Information: Electronic version of the dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Islamic Finance
Divisions: University of Bolton Theses > Centre for Islamic Finance
Depositing User: Tracey Gill
Date Deposited: 15 Nov 2018 14:42
Last Modified: 15 Nov 2018 14:42
URI: http://ubir.bolton.ac.uk/id/eprint/2030

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