Determinants of Bank Capital in Dual Banking Systems

Networks Financial Institute Working Paper Series 2017-WP-04

45 Pages Posted: 1 Nov 2017

See all articles by Mohammad Bitar

Mohammad Bitar

Nottingham University Business School; University of Nottingham

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

William Hippler

University of New Orleans - Department of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 31, 2017

Abstract

We report new evidence on the bank and country-level determinants of Islamic bank capital ratios in 28 countries between 1999 and 2013. Overall, we find that smaller, more profitable, and highly liquid Islamic banks are more highly capitalized. Additionally, improvements in the economic and financial environments and market discipline within a country correspond with higher Islamic bank capitalization. The results shed light on the impact that Sharia’a law restrictions have on Islamic banking capitalization. Our findings are most robust to banks that choose to hold capital well in excess of that required by regulators, consistent with traditional capital structure theory. Our results highlight the role that stable economic and political systems play in improving bank capitalization and reducing financial sector risk. By reducing political instability and corruption, improving legal systems, and encouraging access to capital markets, policymakers may incentivize mangers to make financing decisions that increase the capitalization of the Islamic banking industry in developing countries.

Keywords: bank capitalization, Islamic banking, institutional environment, political distress, market discipline, democracy

JEL Classification: G24, G32, K22

Suggested Citation

Bitar, Mohammad and Hassan, M. Kabir and Hippler, William, Determinants of Bank Capital in Dual Banking Systems (October 31, 2017). Networks Financial Institute Working Paper Series 2017-WP-04, Available at SSRN: https://ssrn.com/abstract=3062686 or http://dx.doi.org/10.2139/ssrn.3062686

Mohammad Bitar (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

University of Nottingham ( email )

Nottingham, Québec
Canada

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

William Hippler

University of New Orleans - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

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