Efficiency in Islamic vs. Conventional Banking: The Role of Capital and Liquidity

58 Pages Posted: 22 Jul 2019

See all articles by Mohammad Bitar

Mohammad Bitar

Concordia University

Kuntara Pukthuanthong

University of Missouri, Columbia

Thomas John Walker

Concordia University, Quebec - Department of Finance

Date Written: July 20, 2019

Abstract

We show that higher capital and liquidity ratios increase the efficiency of conventional and Islamic banks. Using conditional quantile regressions, we further show that the effect is stronger for highly efficient, small, highly liquid, and highly capitalized conventional banks. We also find that more capitalized and liquid banks were more efficient during the 2008/2009 financial crisis and the Arab Spring. Our findings support the view that the constraints imposed by Sharia'a law, may widen the efficiency gap between the two bank types, at the expense of Islamic banks. Furthermore, our findings suggest that the efficiency of conventional banks not only depends on bank capital and liquidity, but also on the level of bank efficiency while the relationship is inconclusive for Islamic banks. These findings provide insight into how capital and liquidity can shape bank efficiency. It suggests that higher capital and liquidity buffers serve a constraint on policymakers and may function very differently depending on the level of bank efficiency.

Keywords: Islamic banking, Capital, Liquidity, Efficiency, Conditional quantile regressions

JEL Classification: G21, G28, G29

Suggested Citation

Bitar, Mohammad and Pukthuanthong, Kuntara and Walker, Thomas John, Efficiency in Islamic vs. Conventional Banking: The Role of Capital and Liquidity (July 20, 2019). Available at SSRN: https://ssrn.com/abstract=3423228 or http://dx.doi.org/10.2139/ssrn.3423228

Mohammad Bitar (Contact Author)

Concordia University ( email )

Montreal, Québec
Canada

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

Thomas John Walker

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada

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