Creditor Rights and Bank Capital Decisions: Conventional vs. Islamic Banking

42 Pages Posted: 25 Feb 2018

See all articles by Mohammad Bitar

Mohammad Bitar

Nottingham University Business School; University of Nottingham

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Date Written: February 10, 2018

Abstract

Using a sample of banks operating in 24 countries, we provide robust evidence that stronger creditor rights are associated with higher capital adequacy ratios of conventional banks but not of Islamic banks. Such results are more effective on bank core capital, suggesting that bank managers tend to increase pure equity to signal better monitoring efforts and avoid losing control in an environment characterized by strong creditor protection. Except in less religious countries with less competitive markets, Islamic banks appear to be less affected by creditor protection possibly because of the profit loss sharing (PLS) principle that considers depositors as investors who agree to share profits and losses with the bank, thus making the effect of creditor protection weaker or irrelevant in an Islamic banking context.

Keywords: Creditor Rights, Market Power, Religion, Bank Capital Ratios, Islamic Banks

JEL Classification: G28, G32, K22

Suggested Citation

Bitar, Mohammad and Tarazi, Amine, Creditor Rights and Bank Capital Decisions: Conventional vs. Islamic Banking (February 10, 2018). Available at SSRN: https://ssrn.com/abstract=3123981 or http://dx.doi.org/10.2139/ssrn.3123981

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

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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