This dissertation examines whether Islamic banks demonstrated relative robustness over conventional banks during the financial crisis. The author conducts an empirical analysis using a sample of 397 banks from 13 countries over 23 years. The dissertation includes sections on banking theory, Islamic banking principles, literature review, data collection and methodology. The data section describes filtering the initial bank panel down to the final sample of a balanced number of similarly sized Islamic and conventional banks from 13 countries to facilitate comparison.
Discusses briefly shadow banks, their role in the subprime crisis, their activities in China, and the regulations and measures taken to control or reduce the negative effects of those financial institutions on the world economy.
Shadow Banking: Implications for Financial Stability and Economic Rebalancing...pkconference
Shadow banking in China has grown rapidly in recent years, increasing financial stability risks. Major shadow banking institutions include trusts, wealth management products, and off-balance sheet bank activities. This rapid growth was driven by regulatory arbitrage as banks sought to expand credit outside of regulatory constraints. However, shadow banking also contributes to high leverage, liquidity and maturity transformation risks, exacerbating China's credit and economic imbalances. More research is needed to understand these systemic risks and appropriate regulatory responses.
Shadow banking refers to credit intermediation that occurs outside the traditional banking system and makes up about a quarter of total financial intermediation globally. It involves entities raising short-term funds to invest in longer-term assets, similar to banks but without the same regulation. During the financial crisis, many shadow banking entities had to sell assets quickly due to investor withdrawals, reducing asset values and spreading uncertainty. The global shadow banking system peaked at $62 trillion in 2007 before declining. Growth is driven by investors seeking higher yields, regulatory arbitrage, and complementing traditional banking.
This document provides an overview of the Chinese shadow banking system, including comparisons to past financial crises. It identifies key risk indicators such as rising house prices and refinancing risk. Scenario analysis highlights inherent risks, and possible solutions are discussed. The shadow banking system has grown rapidly in China in recent years through various products like wealth management programs and local government financing vehicles. There is concern about interconnected risks between banks and shadow banking and a potential crisis if the situation is not monitored closely.
What is Shadow Banking? Is it bad for a Country's Economy?Sachin Karpe
Sachin Karpe explains that the shadow banking system consists of non-depository financial institutions like investment banks, hedge funds, and money market funds. These institutions serve as intermediaries between investors and borrowers, providing credit for profit through fees or interest rate arbitrage. However, the shadow banking system may still expose larger financial markets to excessive systemic risk since shadow banks are highly leveraged with high debt levels and lack the same regulations as traditional banks.
This document discusses shadow banking and efforts to regulate it. Shadow banking involves credit intermediation outside the traditional banking system. While it can expand access to credit, it also poses risks. To address these risks, authorities have adopted a two-pronged strategy involving monitoring shadow banking activities globally and strengthening oversight of specific shadow banking entities and transactions. The 2014 monitoring exercise found that non-bank financial intermediation has grown to $75 trillion globally, with emerging markets showing the most rapid growth. Next steps include continued monitoring and developing regulatory frameworks for areas like money market funds and securities financing transactions.
This study examines the factors that determine the financing supply of Islamic banks in multiple countries. It uses panel data from Islamic banks in Pakistan and Malaysia over several years. The study finds that increases in total deposits and GDP positively impact financing, while increases in the market rate of return, money supply, and bank equity negatively impact financing. The results indicate Islamic banks do not always proportionally increase financing when deposits and equity rise, suggesting excess liquidity. Overall the model explains about 31% of the variation in Islamic bank financing.
Shadow Banking and the Global Financial Crisis: The Regulatory Response (Oxfo...J.P. Reimann
This paper studies the shadow banking system and its regulation since the global financial crisis of 2008. The shadow banking system is a newly coined term, that is not yet (or only very scarcely) regulated or defined. It has been remarked that the shadow banking sector played a major part in the leading up to the crisis. While regulators have been quick to introduce stricter rules for banks and insurance companies, the shadow banks have been left largely untouched by new regulations.
Discusses briefly shadow banks, their role in the subprime crisis, their activities in China, and the regulations and measures taken to control or reduce the negative effects of those financial institutions on the world economy.
Shadow Banking: Implications for Financial Stability and Economic Rebalancing...pkconference
Shadow banking in China has grown rapidly in recent years, increasing financial stability risks. Major shadow banking institutions include trusts, wealth management products, and off-balance sheet bank activities. This rapid growth was driven by regulatory arbitrage as banks sought to expand credit outside of regulatory constraints. However, shadow banking also contributes to high leverage, liquidity and maturity transformation risks, exacerbating China's credit and economic imbalances. More research is needed to understand these systemic risks and appropriate regulatory responses.
Shadow banking refers to credit intermediation that occurs outside the traditional banking system and makes up about a quarter of total financial intermediation globally. It involves entities raising short-term funds to invest in longer-term assets, similar to banks but without the same regulation. During the financial crisis, many shadow banking entities had to sell assets quickly due to investor withdrawals, reducing asset values and spreading uncertainty. The global shadow banking system peaked at $62 trillion in 2007 before declining. Growth is driven by investors seeking higher yields, regulatory arbitrage, and complementing traditional banking.
This document provides an overview of the Chinese shadow banking system, including comparisons to past financial crises. It identifies key risk indicators such as rising house prices and refinancing risk. Scenario analysis highlights inherent risks, and possible solutions are discussed. The shadow banking system has grown rapidly in China in recent years through various products like wealth management programs and local government financing vehicles. There is concern about interconnected risks between banks and shadow banking and a potential crisis if the situation is not monitored closely.
What is Shadow Banking? Is it bad for a Country's Economy?Sachin Karpe
Sachin Karpe explains that the shadow banking system consists of non-depository financial institutions like investment banks, hedge funds, and money market funds. These institutions serve as intermediaries between investors and borrowers, providing credit for profit through fees or interest rate arbitrage. However, the shadow banking system may still expose larger financial markets to excessive systemic risk since shadow banks are highly leveraged with high debt levels and lack the same regulations as traditional banks.
This document discusses shadow banking and efforts to regulate it. Shadow banking involves credit intermediation outside the traditional banking system. While it can expand access to credit, it also poses risks. To address these risks, authorities have adopted a two-pronged strategy involving monitoring shadow banking activities globally and strengthening oversight of specific shadow banking entities and transactions. The 2014 monitoring exercise found that non-bank financial intermediation has grown to $75 trillion globally, with emerging markets showing the most rapid growth. Next steps include continued monitoring and developing regulatory frameworks for areas like money market funds and securities financing transactions.
This study examines the factors that determine the financing supply of Islamic banks in multiple countries. It uses panel data from Islamic banks in Pakistan and Malaysia over several years. The study finds that increases in total deposits and GDP positively impact financing, while increases in the market rate of return, money supply, and bank equity negatively impact financing. The results indicate Islamic banks do not always proportionally increase financing when deposits and equity rise, suggesting excess liquidity. Overall the model explains about 31% of the variation in Islamic bank financing.
Shadow Banking and the Global Financial Crisis: The Regulatory Response (Oxfo...J.P. Reimann
This paper studies the shadow banking system and its regulation since the global financial crisis of 2008. The shadow banking system is a newly coined term, that is not yet (or only very scarcely) regulated or defined. It has been remarked that the shadow banking sector played a major part in the leading up to the crisis. While regulators have been quick to introduce stricter rules for banks and insurance companies, the shadow banks have been left largely untouched by new regulations.
My Master's Thesis with the title "The Elephant in the Regulator's Room: Estimating the Size of the Global Shadow Banking System" compares different approaches to measuring the true size of shadow banking, for which crucial data is still missing. In addition to official statistics, I propose two further methods of empirically estimating assets in this amorphous system following a recent paper. The findings suggest that the system is larger than assumed and accumulated $96 trillion in 2015.
This document discusses definitions of shadow banking. It begins by outlining two main approaches: a negative definition that defines shadow banking as activities outside regular banking, and a positive definition that lists specific activities and entities. The document critiques both approaches. It argues the negative definition is vague and misleading, while a list-based positive definition is inflexible and cannot capture the complexity of shadow banking. The document suggests an alternative definition focused on systemic risk is better, defining shadow banking as credit intermediation that poses systemic risk through maturity, liquidity and credit transformation in a way traditional banks do not. Overall, the document analyzes debates around defining shadow banking and advocates a risk-based definition can more accurately capture its nature.
the role of securitized lending and shadow banking in the 2008 financial cris...Debora Dyankova
The document discusses the role of securitized lending and shadow banking in the 2008 financial crisis. It argues that changes in regulations in the late 1990s connected traditional banking and investment banking, leading to growth of securitized lending and shadow banking. This resulted in a complex global system of interconnected financial institutions with large amounts of securitized assets being traded. The overreliance on securitized lending and lack of oversight of shadow banking contributed to the crisis, as seen when the bankruptcy of Lehman Brothers in 2008 triggered a global recession due to the domino effect across financial systems.
Effect of Liquidity Risk on Performance of Deposit Money Banks in Nigeriaijtsrd
This study examines the effect of the credit risk ratio on the financial performance of deposit money banks in Nigeria. Ex Post Facto research design was employed for the study. Sample sizes of five banks were selected from twenty banks quoted on the Nigerian Stock Exchange. Data were extracted from annual reports and accounts of the selected banks from 2010 to 2019. Using E view statistical tool to test the hypothesis, the study found that credit risk ratio significantly influences the financial performance of quoted deposit money banks in Nigeria It was recommended that bank managers should constantly engage in rigorous credit analysis, checking, default rate, the proportion of non performing loans, regularly or at least quarterly to enable them to maintain high asset quality to enhance the financial performance. Oraka, Azubike O | Ebubechukwu, Jacinta O "Effect of Liquidity Risk on Performance of Deposit Money Banks in Nigeria" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-5 | Issue-4 , June 2021, URL: https://www.ijtsrd.compapers/ijtsrd42388.pdf Paper URL: https://www.ijtsrd.commanagement/other/42388/effect-of-liquidity-risk-on-performance-of-deposit-money-banks-in-nigeria/oraka-azubike-o
Mercer Capital's Bank Watch | August 2019 | Community Bank Valuation (Part 2)Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
The document discusses Mohammad Fheili, an expert in banking and economics with over 30 years of experience. It includes his biography, noting his roles at various banks, experience teaching, and publications. The bulk of the document consists of an outline and slides for a presentation by Fheili on the economics of shadow banking and its inherent risks. The presentation covers topics like how large the shadow banking system is, the channeling and intermediation activities it replicates from traditional banking, and the risks created by its complexity and lack of regulation compared to traditional banking.
The banking sector in Pakistan has undergone significant changes since independence in 1947. It initially suffered from a lack of resources and trained professionals. The State Bank of Pakistan was established in 1948 as the central bank. In the 1970s, all banks were nationalized but their performance deteriorated. Reforms in the early 1990s privatized many banks. Today, Pakistan's banking sector plays a key role in the economy. It includes commercial, specialized, microfinance and Islamic banks. The sector has expanded services and introduced new payment methods in recent years. Reforms have created an efficient, competitive system dominated by private banks rather than state-owned banks.
This document discusses principles of Islamic banking compared to conventional debt-based banking models. Some key points:
- Islamic banking prohibits interest and instead uses profit and loss sharing models where returns are linked to project outcomes rather than a fixed interest rate. This is believed to incentivize more careful project selection.
- Three models are analyzed: pure equity finance as in Islamic banking, pure debt finance, and a hybrid model like Japan's banking system. Islamic banking is argued to better absorb economic shocks since banks have ownership stakes in ventures rather than just lending through debt.
- Sources of funds for Islamic banks include transaction accounts similar to checking accounts where deposits are guaranteed, and investment accounts where depositors become shareholders sharing
Effect of Deposit Money Bank Failure on Economic Development of Nigeria, 2009...ijtsrd
This document discusses the effect of bank failure on Nigeria's economic development from 2009-2019. It begins by establishing that banks play a vital role in providing capital for investment and improving economic well-being, so their collapse can negatively impact economic development. The study uses data from the Nigeria Deposit Insurance Corporation and Central Bank of Nigeria to examine the relationship between bank failure factors like non-performing loans, capital adequacy ratios, and liquidity ratios on unemployment rates. The results found that bank failure Granger causes unemployment in Nigeria over the period studied. The study recommends that banks maintain adequate capital levels and collateral for loans to avoid failures that could undermine economic development.
Liquidity risk is one of the major risks inherent in the banking business. It occurs when the bank does not have sufficient liquid assets to meet its commitments at the time of their occurrence. The most critical challenges confronting financial institutions when managing liquidity risk is so-called non-maturity accounts. These accounts are characterized by the fact that they have no specific contractual maturity, and their risk management is complicated by the embedded options that depositors may exercise. As part of an asset-liability management and for the purpose of healthy and prudential management of a liquidity risk, each bank must properly assess the deposits of its customers. Liquidity risk is not the risk that there are massive withdrawals, but the risk they are unanticipated. In this paper, we apply two methods to model non-maturity deposits of a Moroccan commercial bank. We treat separately individual deposits and enterprise deposits aiming an accurate analysis. We then select between the models by means of a selection criteria. Furthermore, we back-test and forecast future deposits using the selected model. Finally, we model the decay rates of non-maturity deposits by elaborating a flowing function of these latter.
The presentation provided an overview of Islamic banking in Pakistan, including:
1) A brief history of Islamic banking in NWFP including the conversion of Bank of Khyber to an Islamic bank in 2003.
2) Details on the Shariah Supervisory Committee that oversees Islamic operations.
3) Key differences between Islamic and conventional banking, with Islamic banking prohibiting interest but allowing for asset-backed and value-adding financial activities.
This document discusses empirical research on the determinants of bank lending across countries. It proposes estimating equations to model domestic credit levels based on bank balance sheet and capital requirements approaches. The analysis will use data from 146 countries over 1990-2013 to examine how economic growth, banking system health, and external capital flows influence domestic credit after controlling for other factors. Key determinants expected to impact credit include deposits, interest rates, costs, capital levels, and macroeconomic conditions.
This document summarizes a study that examined the determinants of commercial bank lending in Ethiopia between 2005-2011. The study tested whether bank size, credit risk, GDP, investment, deposit, interest rate, liquidity ratio, and cash reserve requirements influenced bank lending. It found that bank size, credit risk, GDP, and liquidity ratio had a significant relationship with lending, but deposit, investment, interest rate, and cash reserves did not. The study suggests banks focus on managing credit risk and liquidity to support lending.
This document summarizes a study that investigated the determinants of commercial bank lending behavior in Nigeria. The study aimed to test how common factors like deposits, investments, interest rates, reserve requirements, and liquidity ratios affect bank lending. Regression analysis found the model to be significant, with deposits having the greatest impact on lending. The study suggests banks focus on deposit mobilization to enhance lending performance and develop strategic plans.
This paper examined the bank-specific determinants for commercial bank’s liquidity in Namibia. The
study was based on quarterly data covering the period 2001:Q1 to 2014:Q2, utilizing the technique of unit root and
ordinary least squares. The results of the unit root test showed that all variable were stationary in levels and thus,
the ordinary least squares technique was used to conduct the estimation. The results revealed a statistical
insignificant negative relationship between commercial bank’s liquidity and return on equity as a measure of
commercial bank’s profitability. Furthermore, the results also showed a positive relationship between commercial
bank’s liquidity and capital adequacy as well as between commercial bank’s liquidity and non-performing loans
though statistical insignificant.
The Basel III regulations are devised to mitigate damage to the economy caused by banks that take on excess risk. This third instalment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is aimed at improving the banking sector's ability to deal with financial stress, improve risk management, and strengthen the banks' transparency. It is part of the continuous effort to enhance the banking regulatory framework and builds on the Basel I and Basel II documents.
The document discusses the role of financial systems and stock markets in economic development. It provides an overview of Pakistan's financial system, including the historical dominance of informal finance. While financial reforms in recent decades improved access to formal institutions, stock markets remain underdeveloped in Pakistan. The document analyzes constraints like low interest rates, weak regulation, and political instability that have limited stock market growth. It recommends further reforms like reducing corporate leverage, encouraging bond markets, and improving disclosure to strengthen Pakistan's financial system.
The aim of this paper is to analyze the liquidity levels of various banks in the UAE for the period 2005-2009. To understand the behavior of liquidity indicators especially during the financial crisis, the researcher will analyze the four liquidity indicators over the years 2005 to 2009. The findings highlight how the banks in question have been impacted by the 2007-2008 crisis. This can most obviously be seen in the notable decline of each of the banks liquidity level in 2009. The effect of loans to total assets, loans to customers’ deposit, and investment to total assets ratios for the five banks was most notable in 2009. Two liquidity ratios were analyzed in order to determine the banks’ ability to honor its debt obligations, these being loans to total assets and loans to customers respectively. The third ratio was the total equity to total assets to assess the liquidity level in the capital structure, while the fourth ratio was the investment to total assets to measure the managing of liquidity. While Bank liquidity was affected by the crisis, bank performance remained relatively stable, as measured by coefficient of variation, since these banks were able to yield more control over cash flows in comparison to revenues and costs.
Restarting asset backed securities and current developments in the securitiza...Alexander Decker
This document summarizes a research paper on restarting asset-backed securities (ABS) in Europe after the 2007-2008 financial crisis. It discusses how securitization contributed to the crisis but can also help address economic crises and distressed companies' needs for capital. The paper examines how regulatory reforms are reshaping ABS business, using data on developments in Europe. Hypotheses are tested on the crisis's impact through statistical analysis. Results show the crisis had a minimal effect, and ABS is now mainly shaped by new regulations.
This document is an MBA dissertation investigating consumer reactions to corporate social responsibility (CSR) as it relates to brand image, using Primark in London as a case study. The dissertation includes an introduction, literature review on the clothing/retail sectors and CSR/brand image theory, conceptual framework, research methodology involving a survey of 152 London respondents, data analysis and findings, conclusions, and references. The literature review provides background on the decline of clothing manufacturing in the UK and rise of value retailers like Primark. The research aims to understand consumer attitudes towards CSR and Primark's brand, and the relationship between CSR and brand image/consumer behavior.
Aminul Hoque Dissertation: Impact of CSR on Brand ImageAminul Hoque
The purpose of this study is to explore the relationship between CSR and Brand image. Moreover, the study also aims to find out if there is a positive correlation between the two. As current literature is yet to define if CSR has an impact on brand image, this dissertation aims to provide insights into purchasing behaviour as well as perception of consumers on brand image.
My Master's Thesis with the title "The Elephant in the Regulator's Room: Estimating the Size of the Global Shadow Banking System" compares different approaches to measuring the true size of shadow banking, for which crucial data is still missing. In addition to official statistics, I propose two further methods of empirically estimating assets in this amorphous system following a recent paper. The findings suggest that the system is larger than assumed and accumulated $96 trillion in 2015.
This document discusses definitions of shadow banking. It begins by outlining two main approaches: a negative definition that defines shadow banking as activities outside regular banking, and a positive definition that lists specific activities and entities. The document critiques both approaches. It argues the negative definition is vague and misleading, while a list-based positive definition is inflexible and cannot capture the complexity of shadow banking. The document suggests an alternative definition focused on systemic risk is better, defining shadow banking as credit intermediation that poses systemic risk through maturity, liquidity and credit transformation in a way traditional banks do not. Overall, the document analyzes debates around defining shadow banking and advocates a risk-based definition can more accurately capture its nature.
the role of securitized lending and shadow banking in the 2008 financial cris...Debora Dyankova
The document discusses the role of securitized lending and shadow banking in the 2008 financial crisis. It argues that changes in regulations in the late 1990s connected traditional banking and investment banking, leading to growth of securitized lending and shadow banking. This resulted in a complex global system of interconnected financial institutions with large amounts of securitized assets being traded. The overreliance on securitized lending and lack of oversight of shadow banking contributed to the crisis, as seen when the bankruptcy of Lehman Brothers in 2008 triggered a global recession due to the domino effect across financial systems.
Effect of Liquidity Risk on Performance of Deposit Money Banks in Nigeriaijtsrd
This study examines the effect of the credit risk ratio on the financial performance of deposit money banks in Nigeria. Ex Post Facto research design was employed for the study. Sample sizes of five banks were selected from twenty banks quoted on the Nigerian Stock Exchange. Data were extracted from annual reports and accounts of the selected banks from 2010 to 2019. Using E view statistical tool to test the hypothesis, the study found that credit risk ratio significantly influences the financial performance of quoted deposit money banks in Nigeria It was recommended that bank managers should constantly engage in rigorous credit analysis, checking, default rate, the proportion of non performing loans, regularly or at least quarterly to enable them to maintain high asset quality to enhance the financial performance. Oraka, Azubike O | Ebubechukwu, Jacinta O "Effect of Liquidity Risk on Performance of Deposit Money Banks in Nigeria" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-5 | Issue-4 , June 2021, URL: https://www.ijtsrd.compapers/ijtsrd42388.pdf Paper URL: https://www.ijtsrd.commanagement/other/42388/effect-of-liquidity-risk-on-performance-of-deposit-money-banks-in-nigeria/oraka-azubike-o
Mercer Capital's Bank Watch | August 2019 | Community Bank Valuation (Part 2)Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
The document discusses Mohammad Fheili, an expert in banking and economics with over 30 years of experience. It includes his biography, noting his roles at various banks, experience teaching, and publications. The bulk of the document consists of an outline and slides for a presentation by Fheili on the economics of shadow banking and its inherent risks. The presentation covers topics like how large the shadow banking system is, the channeling and intermediation activities it replicates from traditional banking, and the risks created by its complexity and lack of regulation compared to traditional banking.
The banking sector in Pakistan has undergone significant changes since independence in 1947. It initially suffered from a lack of resources and trained professionals. The State Bank of Pakistan was established in 1948 as the central bank. In the 1970s, all banks were nationalized but their performance deteriorated. Reforms in the early 1990s privatized many banks. Today, Pakistan's banking sector plays a key role in the economy. It includes commercial, specialized, microfinance and Islamic banks. The sector has expanded services and introduced new payment methods in recent years. Reforms have created an efficient, competitive system dominated by private banks rather than state-owned banks.
This document discusses principles of Islamic banking compared to conventional debt-based banking models. Some key points:
- Islamic banking prohibits interest and instead uses profit and loss sharing models where returns are linked to project outcomes rather than a fixed interest rate. This is believed to incentivize more careful project selection.
- Three models are analyzed: pure equity finance as in Islamic banking, pure debt finance, and a hybrid model like Japan's banking system. Islamic banking is argued to better absorb economic shocks since banks have ownership stakes in ventures rather than just lending through debt.
- Sources of funds for Islamic banks include transaction accounts similar to checking accounts where deposits are guaranteed, and investment accounts where depositors become shareholders sharing
Effect of Deposit Money Bank Failure on Economic Development of Nigeria, 2009...ijtsrd
This document discusses the effect of bank failure on Nigeria's economic development from 2009-2019. It begins by establishing that banks play a vital role in providing capital for investment and improving economic well-being, so their collapse can negatively impact economic development. The study uses data from the Nigeria Deposit Insurance Corporation and Central Bank of Nigeria to examine the relationship between bank failure factors like non-performing loans, capital adequacy ratios, and liquidity ratios on unemployment rates. The results found that bank failure Granger causes unemployment in Nigeria over the period studied. The study recommends that banks maintain adequate capital levels and collateral for loans to avoid failures that could undermine economic development.
Liquidity risk is one of the major risks inherent in the banking business. It occurs when the bank does not have sufficient liquid assets to meet its commitments at the time of their occurrence. The most critical challenges confronting financial institutions when managing liquidity risk is so-called non-maturity accounts. These accounts are characterized by the fact that they have no specific contractual maturity, and their risk management is complicated by the embedded options that depositors may exercise. As part of an asset-liability management and for the purpose of healthy and prudential management of a liquidity risk, each bank must properly assess the deposits of its customers. Liquidity risk is not the risk that there are massive withdrawals, but the risk they are unanticipated. In this paper, we apply two methods to model non-maturity deposits of a Moroccan commercial bank. We treat separately individual deposits and enterprise deposits aiming an accurate analysis. We then select between the models by means of a selection criteria. Furthermore, we back-test and forecast future deposits using the selected model. Finally, we model the decay rates of non-maturity deposits by elaborating a flowing function of these latter.
The presentation provided an overview of Islamic banking in Pakistan, including:
1) A brief history of Islamic banking in NWFP including the conversion of Bank of Khyber to an Islamic bank in 2003.
2) Details on the Shariah Supervisory Committee that oversees Islamic operations.
3) Key differences between Islamic and conventional banking, with Islamic banking prohibiting interest but allowing for asset-backed and value-adding financial activities.
This document discusses empirical research on the determinants of bank lending across countries. It proposes estimating equations to model domestic credit levels based on bank balance sheet and capital requirements approaches. The analysis will use data from 146 countries over 1990-2013 to examine how economic growth, banking system health, and external capital flows influence domestic credit after controlling for other factors. Key determinants expected to impact credit include deposits, interest rates, costs, capital levels, and macroeconomic conditions.
This document summarizes a study that examined the determinants of commercial bank lending in Ethiopia between 2005-2011. The study tested whether bank size, credit risk, GDP, investment, deposit, interest rate, liquidity ratio, and cash reserve requirements influenced bank lending. It found that bank size, credit risk, GDP, and liquidity ratio had a significant relationship with lending, but deposit, investment, interest rate, and cash reserves did not. The study suggests banks focus on managing credit risk and liquidity to support lending.
This document summarizes a study that investigated the determinants of commercial bank lending behavior in Nigeria. The study aimed to test how common factors like deposits, investments, interest rates, reserve requirements, and liquidity ratios affect bank lending. Regression analysis found the model to be significant, with deposits having the greatest impact on lending. The study suggests banks focus on deposit mobilization to enhance lending performance and develop strategic plans.
This paper examined the bank-specific determinants for commercial bank’s liquidity in Namibia. The
study was based on quarterly data covering the period 2001:Q1 to 2014:Q2, utilizing the technique of unit root and
ordinary least squares. The results of the unit root test showed that all variable were stationary in levels and thus,
the ordinary least squares technique was used to conduct the estimation. The results revealed a statistical
insignificant negative relationship between commercial bank’s liquidity and return on equity as a measure of
commercial bank’s profitability. Furthermore, the results also showed a positive relationship between commercial
bank’s liquidity and capital adequacy as well as between commercial bank’s liquidity and non-performing loans
though statistical insignificant.
The Basel III regulations are devised to mitigate damage to the economy caused by banks that take on excess risk. This third instalment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is aimed at improving the banking sector's ability to deal with financial stress, improve risk management, and strengthen the banks' transparency. It is part of the continuous effort to enhance the banking regulatory framework and builds on the Basel I and Basel II documents.
The document discusses the role of financial systems and stock markets in economic development. It provides an overview of Pakistan's financial system, including the historical dominance of informal finance. While financial reforms in recent decades improved access to formal institutions, stock markets remain underdeveloped in Pakistan. The document analyzes constraints like low interest rates, weak regulation, and political instability that have limited stock market growth. It recommends further reforms like reducing corporate leverage, encouraging bond markets, and improving disclosure to strengthen Pakistan's financial system.
The aim of this paper is to analyze the liquidity levels of various banks in the UAE for the period 2005-2009. To understand the behavior of liquidity indicators especially during the financial crisis, the researcher will analyze the four liquidity indicators over the years 2005 to 2009. The findings highlight how the banks in question have been impacted by the 2007-2008 crisis. This can most obviously be seen in the notable decline of each of the banks liquidity level in 2009. The effect of loans to total assets, loans to customers’ deposit, and investment to total assets ratios for the five banks was most notable in 2009. Two liquidity ratios were analyzed in order to determine the banks’ ability to honor its debt obligations, these being loans to total assets and loans to customers respectively. The third ratio was the total equity to total assets to assess the liquidity level in the capital structure, while the fourth ratio was the investment to total assets to measure the managing of liquidity. While Bank liquidity was affected by the crisis, bank performance remained relatively stable, as measured by coefficient of variation, since these banks were able to yield more control over cash flows in comparison to revenues and costs.
Restarting asset backed securities and current developments in the securitiza...Alexander Decker
This document summarizes a research paper on restarting asset-backed securities (ABS) in Europe after the 2007-2008 financial crisis. It discusses how securitization contributed to the crisis but can also help address economic crises and distressed companies' needs for capital. The paper examines how regulatory reforms are reshaping ABS business, using data on developments in Europe. Hypotheses are tested on the crisis's impact through statistical analysis. Results show the crisis had a minimal effect, and ABS is now mainly shaped by new regulations.
This document is an MBA dissertation investigating consumer reactions to corporate social responsibility (CSR) as it relates to brand image, using Primark in London as a case study. The dissertation includes an introduction, literature review on the clothing/retail sectors and CSR/brand image theory, conceptual framework, research methodology involving a survey of 152 London respondents, data analysis and findings, conclusions, and references. The literature review provides background on the decline of clothing manufacturing in the UK and rise of value retailers like Primark. The research aims to understand consumer attitudes towards CSR and Primark's brand, and the relationship between CSR and brand image/consumer behavior.
Aminul Hoque Dissertation: Impact of CSR on Brand ImageAminul Hoque
The purpose of this study is to explore the relationship between CSR and Brand image. Moreover, the study also aims to find out if there is a positive correlation between the two. As current literature is yet to define if CSR has an impact on brand image, this dissertation aims to provide insights into purchasing behaviour as well as perception of consumers on brand image.
This document is a dissertation that investigates the role of bank lending in causing the 2007-2008 global financial crisis. It examines debt levels, the subprime mortgage market, and bank lending before and after the crisis. The study aims to determine if rising debt, particularly from subprime mortgages and banks, was the underlying driver of the crisis. It will analyze debt and lending data from major economies to identify trends and assess arguments that excessive credit and risky lending practices overwhelmed the financial system. The dissertation also considers the impact of reduced bank lending after the crisis in prolonging the economic downturn.
This document is a dissertation submitted by Carlos Curbera for a Masters in Banking, Finance and Risk Management. It examines the causes and impacts of the international financial crisis on Spain. The introduction provides background on Spain's housing bubble and economic boom leading up to the 2008 crisis. It discusses the country's high private debt, weak external competitiveness, and skyrocketing unemployment in the aftermath. The dissertation aims to analyze why the crisis had a deeper and longer-lasting impact in Spain compared to other nations and identify actions needed to stimulate economic recovery. It includes chapters on Spain's experience during the subprime crisis, past economic crises in modern Spain, proposed policies to revitalize the economy with a focus on SMEs
El documento presenta información sobre el sector turístico en Venezuela. Señala que el turismo es considerado de gran importancia para la economía venezolana, aportando alrededor del 3.4% del PIB. La Constitución de 1999 establece al turismo como una actividad económica de interés nacional prioritaria. En 2008 se publicó la Ley Orgánica de Turismo, la cual promueve y regula la actividad turística nacional. Esta ley establece varios incentivos fiscales para prestadores de servicios turísticos, incluyendo
Este documento describe un proyecto para elaborar folletos sobre el cuidado de la naturaleza. Los estudiantes aprenderán sobre las características de los folletos y cómo usarlos para informar a otros sobre la contaminación y estrategias para contrarrestar sus efectos. El proyecto incluye ver videos, investigar sobre contaminación, intercambiar ideas, elaborar borradores de folletos y crear productos finales para compartir con la comunidad escolar.
Immigrants have long contributed to America's prosperity and culture through hard work and assimilation. However, recent trends toward dual citizenship are concerning. Some immigrants form insular communities and send money abroad, hurting the US economy. Dual citizenship can also promote feelings of alienation and distrust of mainstream American culture, potentially encouraging radicalization. For the welfare of the country, immigrants should embrace single allegiance to the US and encourage their children to assimilate fully into American society.
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Lesson 6 Discussion Forum Discussion assignments will beDioneWang844
Lesson 6 Discussion Forum :
Discussion assignments will be graded based upon the criteria and rubric specified in the Syllabus.
550 Words
For this Discussion Question, complete the following.
1. Review the two articles about bank failures and bank diversification that are found below this. Economic history assures us that the health of the banking industry is directly related to the health of the economy. Moreover, recessions, when combined with banking crisis, will result in longer and deeper recessions versus recessions that do occur with a healthy banking industry.
2. Locate two JOURNAL articles which discuss this topic further. You need to focus on the Abstract, Introduction, Results, and Conclusion. For our purposes, you are not expected to fully understand the Data and Methodology.
3. Summarize these journal articles. Please use your own words. No copy-and-paste. Cite your sources.
Please post (in APA format) your article citation.
Reply to Post 1: 160 words and Reference
Discussion on Bank’s failures and its diversification
Over the last two decades, business cycle volatility has decreased in the US. For example, some analysts claimed that companies handle inventory better today than ever, or that advances in financial systems have helped smooth industry volatility. Some emphasized stronger economic policy. Banking changes were also drastic in this same era, contributing to the restructuring and convergence of massive, global banking institutions in a better-organized structure. The article (Strahan, 2006) points out that some regulatory reform driven by individual countries rendered it possible for banks to preserve their resources and income by gradually diversifying from local downturns. Both low state volatility rates and a decline in partnerships between the local market and the central banking sector is a net influence on the diversification in banks. Considering the less fragile state economies following these intergovernmental financial reforms, there are some signs that financial convergence – while certainly not the only piece of the puzzle – has been less unpredictable.
Another article (Walter, 2005) argues that a long-standing reason for bank collapses during the crisis is a contagion, which contributes to systemic bank failures and the collapse of one bank initially. This indicates why several losses in the crisis period were unintentional, which ensured that the banks remained stable and endured without contagion-induced falls. The response to the contagion was the central government’s deposit policy, bringing an end to defaults. Nevertheless, since the sequence of errors began in the early 1920s, well before contagion was evident, the underlying trigger must be contagion.
Now it seems like the bank sector has undergone a shake-out that was worsened during the crisis by the deteriorating economic conditions. Although the reality that incidents occurred almost syno ...
This document provides a final project report on credit risk management in banks. The report contains 12 chapters that discuss topics such as the importance of credit risk assessment, credit risk modeling, data collection, and model validation. The report finds that banks need sophisticated systems to quantify and manage credit risk across business lines. It evaluates traditional credit risk measurement approaches like expert systems and discusses the need for banks to have strong management information systems and analytical techniques to measure credit risk. The report aims to provide an accurate and comprehensive framework for estimating credit risk to help banks quantify capital needs to support risk-taking activities.
The document summarizes the key topics discussed at the Federal Reserve Bank of Chicago's annual Capital Markets Conference. Representatives from global regulatory agencies and financial institutions explored issues related to capital markets supervision. Topics included credit risk models and their use in Basel's capital adequacy framework, operational risk, developments in energy derivatives, and new electronic trading systems for over-the-counter derivatives. Regulators discussed challenges including risk management, concentration risk, and the impact of deregulation and consolidation in the financial sector. There was also a focus on using internal credit risk models to link banks' risk assessments to regulatory capital requirements in a more risk-sensitive manner.
The document discusses foreign equity investment in Pakistan's Islamic banking system. It provides background on the introduction of interest-free banking in Pakistan in the 1970s. It then analyzes performance measures for Islamic, government, and private banks in Pakistan from 2006-2010 based on ratios like return on assets, equity, and liquidity. Overall, Islamic banks showed gradually increasing balance sheets but zigzagging income statements, while government banks grew steadily except for reserves. The conclusion is that Islamic banking provides an alternative to conventional systems and attracts foreign investment due to its adherence to strong beliefs.
The relationship and effect of credit and liquidity risk on bank default
disso final
1. MSC DISSERTATION
Did the financial crisis demonstrate the relative robustness of
Islamic banks over their Conventional counterparts?
DEPARTMENT OF ECONOMICS, UNIVERSITY OF WARWICK
Raza Rehman (ID: 1463577)
Supervisor: Mr Alexander Karalis Isaac
September 2015
Word count: 5934 (excluding appendix, footnotes and references)
Abstract: The consequences of the Great Depression raised concerns regarding the reliability of the Conventional
banking system and coupled with the noteworthy growth of Islamic banking, has sparked interest in this new model.
With the literature varying on the relative rigor of the Islamic banking model, this dissertation aims to provide an
alternative perspective on the debate using a sample of 397 banks from 13 countries over a 23 year period.
Employing the Fixed Effects estimation technique, it is found that Islamic banks do not offer the extra element of
safety implicit in their theoretical model, revealing the possibility of a lack of risk management expertise and the
diversity of Islamic banking practices due to different interpretations of the Islamic guidelines
This dissertation proposal is submitted in partial fulfilment of EC 959 MSc Dissertation for the degree of MSc Economics
2. 1
Acknowledgement:
First and foremost, I thank Allah for showering me with His unconditional blessings and giving
me the opportunity to study at a renowned university alongside some of the most talented
academics. Mr Alexander Karalis Isaac has been a great inspiration and his support gave me the
confidence to compile this paper. I would also like to thank my family and friends, who have
always been my pillar of support throughout my each and every endeavour.
4. 3
1. Introduction
The finance-growth nexus has been explored in great detail with varying conclusions to the
direction of causality. Evidence supporting financial development as a factor of economic
growth has been widely documented together with arguments for the reverse and even
bidirectional relationship. Nevertheless, it is universally accepted that stability in the financial
sector is vital to economic growth and this was made evident during the recent financial crisis.
The 2007/08 financial crisis, or Great Recession, was one of the worst to hit the United States
since the thirties. The Bureau of Labor Statistics found that unemployment more than doubled
from 4.7% in December 2007 to a peak of 10% in October 2009, with the real Gross Domestic
Product decreasing by 3.8% in early 2009 (Swann, 2009). An upward trend in house prices,
favourable government policies and optimistic expectations attracted a surge in demand for real
estate from both first-time home buyers and aspiring realtors. Also wanting to capitalise on the
situation, banks loaded their portfolios with mortgages to prime but worryingly sub-prime
borrowers. In 2002, less than 10% of U.S. mortgages were subprime but accounted for almost
25% in 2005 (Goodwin et al., 2013).
Under the Basel accords, banks were required to maintain at least an 8 percent capital buffer
against their assets after adjusting for risk however, the activity in the housing market meant
complying with such requirements was going to be costly. To avoid such losses, banks took part
in Securitization and introduced the capital market into its transactions. A period of unorthodox
lending of mortgages, complex financial instrument engineering and lenient regulation brought
about the rapid expansion of the housing bubble. Once house prices stopped rising and the sub-
prime mortgage borrowers started to default, the value of these AAA-rated financial instruments
(i.e. Collateralized Debt Obligations) completely diminished and panic spurred. The ultimate
bust of the housing bubble led to bank runs and the collapse of giants such as Lehman Brothers
and Freddie Mac, triggering the failure of a series of financial institutions that prompted a global
economic downturn.
The trustworthiness of the central culprit of the crisis - the banking system – has since been
under question. The distinctive principles that shape its model coupled with its unprecedented
growth has sparked interest in Islamic Banking and Finance. Pre-crisis, global Islamic banking
5. 4
assets increased by almost 20% per annum till 2013 (Islamic Financial Services Board, 2015)
and according to the World Islamic Banking Competitiveness Report 2013/14 by EY, continued
such patterns following the crisis, growing 16% since 2011. With an increasing Muslim
population, relatively untapped market and repeated episodes of financial market failures1
, this
new mode of Islamic Banking and Finance may be of great benefit to the global economy. The
objective of this dissertation is to shed light to the argument of whether the alternative banking
system based on Islamic teachings is the way forward towards a more stable global community.
By analysing the performance of Islamic Banks and their conventional peers across the financial
crisis, the dissertation aims to answer the following question:
“Did the financial crisis demonstrate the relative robustness of Islamic banks over their
Conventional counterparts?”
The paper is organized as follows. Section 2 outlines the theory behind financial
intermediation, with a description of the Islamic banking model and the principles underlying its
framework in Section 3. Section 4 reviews the literature that has inspired the dissertation. Section
5 discusses the data and the methodology adopted is discussed in Section 6. Section 7 follows
with the results of the analysis. A discussion of the results is given in Section 8 and finally,
Section 9 encompasses a conclusion along with potential areas of future research.
1
“…100 crises in the past 35 years” Stiglitz (2003), Dealing with Debt: How to Reform the Global Financial System, page 54.
6. 5
2. Banking theory
In an Arrow-Debreu setting with a complete set of state-contingent markets and absence of
information and transaction costs, any equilibrium allocation is a Pareto optimum and financial
intermediation only creates a distortion to the economy. However, such conditions are unrealistic
and agents face costs of acquiring information and conducting transactions, which if
considerably large may discourage economic exchange. The ability to reduce such costs and in
turn, facilitate trade allows scope for financial intermediation.
This notion was introduced formally by Diamond (1984). His theory embodies the difficulty
faced by individual lenders to screen feasible projects together with minimising the costs
associated with monitoring the actions of borrowers once contracts are signed. Furthermore,
Diamond pointed out that individual lending can lead to either the duplication of information
when each lender monitors or no monitoring whatsoever as lenders will wish to free-ride, i.e.
each person presumes the other will monitor which results in an absence of monitoring. As
intermediaries, banks face cost advantages of framing and monitoring loan contracts which allow
for Pareto optimal allocations to be achieved, ceteris paribus.
Despite banks and other financial institutions being similar in their totality, banks hold a
certain feature that distinguishes them from other financial institutions. This unique function of a
bank is referred to as ‘maturity transformation’; that is, the conversion of long-term illiquid
investments into liquid deposits (Diamond and Dybvig, 1983). Returns are generally higher for
projects that offer payoffs later in the future however, many investors shy away from such
projects. Banks conversely, due to the unique feature of being able to offer depositors access to
their savings before the returns from the investments are realised, fill this void and finance such
projects. This allows depositors with different consumption preferences to smooth consumption
by withdrawing funds according to their expenditure plans. Despite demonstrating that this
creation of liquidity can boost output, Diamond & Dybvig (1983) find that this function has also
one weakness which is that it is vulnerable to ‘bank runs’, i.e. collective withdrawal of deposits
by customers in response to expectations of the bank failing. These bank runs force the bank to
liquidate the long-term investments at a loss that can lead to bankruptcy and have adverse
implications on economic activity.
7. 6
Market rumours and confidence levels play focal roles in the health of the financial sector
due to their contagious property and are the main cause behind bank runs. Lack of confidence
stemming from speculations associated to a particular bank can spread to other stable banks as
depositors will want to withdraw their savings before a run commences, ultimately resulting in a
bank run. Panics of such nature test banking systems and the dissertation aims to supplement the
literature by applying this notion to the resilience of Islamic and Conventional banks during the
Great Depression. Before doing so, the following section gives a brief description of the Islamic
banking system.
8. 7
3. Islamic Banking framework
Islam echoes modern economics in that trade should be encouraged in order to achieve
economic growth and development. Where rationality plays the central role in traditional
economic theory, the Islamic concept encompasses both moral and spiritual dimensions to the
problem on the premise that personal pursuit of welfare maximization does not necessarily
translate to an improvement in the general welfare of the society (Iqbal and Mirakhor, 2013).
Contradictory to popular belief, Adam Smith also held views mirroring those extrapolated by
Islam in his work Theory of Moral Sentiment (1979), in which Smith voices his belief of a
Supreme Power and emphasises that following the guidelines revealed by the Creator will
internalise distortions in a country and produce fair outcomes.
Despite the role of both Islamic banks and Conventional banks being parallel and the
prominent theories of banking applying to both, their underlying models are distinct. The
adherence to Shari’ah, i.e. Islamic law, distinguishes Islamic banks from their Conventional
peers. The Islamic banking model, although introduced a few decades ago, is characterised by
principles revealed during the infancy of Islam, which are defined under fiqh mualamat (rules on
transactions).
The overarching of these is the prohibition of the receipt and payment of Riba, i.e. interest.
Money serves only as a store of value and medium of exchange in Islam and treating it as a
commodity to make money is regarded as a major sin. The condemnation of interest can be
attributed to the following passage of the Quranic scripture;
“O you who have believed, do not consume usury, doubled and/or multiplied, but fear
Allah that you may be successful.”2
Trade plays an integral part of the Islamic economic system and compensation for investment
is valued however, the risk of a venture must be divided amongst the parties involved. In other
words, risk should be shared rather than transferred. Instead of interest, the returns of an
investment stem from profit and loss sharing, which encourages prudent lending, efficient
2
The Holy Quran, Chapter 3 (Al-Imran), Verses 130-131.
9. 8
entrepreneurship and more importantly, an equitable distribution of funds. The following verses
from the Quran express this;
“…Allah has permitted trade and has forbidden interest.”3
“O you who have believed. Squander not your wealth among yourselves in vanity, except it
be a [lawful] trade by mutual consent, and kill not one another. Indeed, Allah is ever Merciful
unto you.”4
Despite the promotion of profitable trade, illicit activities and forbidden sectors such as
pork, alcohol, drugs etc. cannot be extended finance irrespective of potentially high returns.
Excessive uncertainty, or Gharar, via excessive risk-taking and speculation nullify a contract as
any monetary gains obtained are through sheer luck and not effort. Lastly, financial activity must
have an association with the real sector activity such that lending can be linked to the underlying
asset.
To incorporate the principles mentioned above, two modes of financing have been structured;
these are the Mudarabah (passive partnerships) and Musharakah (active partnerships)
arrangements. The Mudarabah contract involves a capital provider (bank) and an investment
manager (borrower) in which the former party remains isolated from the venture. The returns to
each party are a proportion of the profits, if any, according to a pre-agreed ratio but the financial
losses are borne solely by the capital provider. The losses faced by the investment manager are
the time and effort expended. The Musharakah contract differs to the Mudarabah in that the
bank may not be the exclusive investor and can, but is not required to, participate in the
management decisions. Again the profits are shared in accordance to a ratio agreed at the time of
the contract and losses equate to the respective capital investments. Where profit sharing does
not apply, other modes of financing have been designed and a description of these is given in
Table 6 under the Appendix.
3
The Holy Quran, Chapter 2 (Al-Bakarah), Verse 275.
4
The Holy Quran, Chapter 4 (An-Nisa), Verse 29.
10. 9
4. Literature Review
Established in 1975, Dubai Islamic Bank became the first bank to offer Shari’ah compliant
products and services. Since then, the growth in the size and number of Islamic banks and
financial institutions has been unmatched, reaching major economies in the West5
and some
large Conventional banks opening Islamic windows6
. Given its recent beginning, literature on
Islamic banking performance is relatively scarce. The majority of the work is theoretical and the
empirical papers focus on country-specific analysis before the U.S. housing bubble even started
to materialise. Nevertheless, contributions examining cross-country comparisons with its
Conventional counterparts across the financial crisis have been documented.
Hasan and Dridi (2010) evaluate Islamic and Conventional banks from eight countries under
four criteria; profitability, asset growth, credit growth and external ratings. Using non-parametric
analysis, they found that Islamic banks outperformed their counterparts in terms of the latter
three measures and matched them in terms of profitability, attributing the results to the adherence
of Shari’ah principles. However, Islamic banks were found to be adversely affected by the
second-round effects due to lack of credit diversification. Furthermore, they found that larger
Islamic banks were more profitable due to economies of scale and strong reputation; contrary to
the results found by Cihak and Hesse (2010).
Distinguishing by size, Cihak and Hesse (2010) use the Z-score on a sample ranging from
1993-2004 to conclude that Islamic banks fared better than non-Islamic banks when small but
become financially weaker as they grow, reflecting the difficulty of scaling credit risk
management systems. The differing results to Hasan and Dridi (2010) could be due to different
samples and different definition of large banks.
Beck et al. (2013) compare business orientation, efficiency, asset quality and stability in 22
countries and found that Islamic banks were less-cost effective but had higher intermediation
ratios and were better capitalized, which supported Islamic banks across the crisis. The results
obtained by Bourkhis and Nabi (2013) contrast the common finding of relative serenity of
Islamic bank performance. Also using the Z-score, they find that there was no significant
5
E.g. United Kingdom, United Sstates, Germany, etc.
6
Department in a Conventional bank that provides Islamic banking products and services.
11. 10
difference in the effect of the crisis on the soundness of both types of banks, implying a
diversion of Islamic banks from their theoretical models.
In theory, the principles underlying the Islamic banking system should act as a defence
against such financial crises and even mitigate the likelihood of such occurrences. In fact, those
that found Islamic banks to have performed better than their Conventional counterparts have
suggested that the Islamic principles have been the reason for this. That is, the sharing of risk,
extension of credit based on moral criteria and the constraint on uncertainty should armour
Islamic banks from such episodes. However, the inconsistent results have motivated my decision
to explore the argument and evaluate whether Islamic banking can be beneficial to financial, and
ultimately, economic stability. By revising the approach used in existing work, the dissertation
will hope to complement the literature and provide an alternative perspective on the Islamic vs
Non-Islamic banking debate and determine whether or not the Islamic banking framework could
prevent such episodes in the future.
12. 11
5. Data
An initial panel of 2489 banks across 32 countries was constructed however, the balance
between Islamic and Conventional banks was considerably disproportionate. To address this,
countries homing either very small and/or very few Islamic banks in relation to Conventional
banks were dropped. Specifically, countries with an Islamic bank presence in terms of total
assets of less than $5bn were excluded. Furthermore, conflict prone countries including
Palestine, Iraq, etc. where also removed from the sample in order for the financial crisis to be the
central focus. The sample was further trimmed by removing countries with a sum of total Islamic
banking assets of less than $950m along with those countries in which total assets of Islamic
banks were much larger or much smaller than the other countries. Finally, banks with data not
extending till the end of the crisis were dropped, resulting in a final dataset of 397 banks of
similar size from 13 countries across 23 years (1993-2015 inclusive). Banks with branches in
other countries were considered as separate entities. Table 1 presents the number of both types of
banks in the final sample.
Table 1: Number of banks in sample
Country Islamic Conventional Total banks
Bahrain 19 12 31
Bangladesh 7 38 45
Egypt 3 23 26
Indonesia 10 62 72
Jordan 3 11 14
Kuwait 11 5 16
Malaysia 18 33 51
Pakistan 9 22 31
Qatar 6 6 12
Saudi Arabia 5 8 13
Sudan 16 9 25
Turkey 4 30 34
United Arab Emirates 9 18 27
Total 120 277 397
13. 12
The variables used can be divided into two categories; bank-specific and macroeconomic
indicators. The first set of variables were obtained from the Bankscope database, which compiles
information financial institutions across the globe. For the macroeconomic variables, the World
Bank database was relied upon. Table 2 provides a brief description of the variables used in the
study and their relation to the dependent variable, i.e. the log transformation of the Z-score
(discussed in Section 6).
Table 2: Description of provisional variables
Variables
(Regressors)
Description
Expected
effect
Explanation
Equity ratio +
Capital stock acts as buffer for banks to repay
depositors when facing losses and allows for
diversification and higher income.
Loan Loss Reserve -
Non-performing loans cause a reduction in equity
while reducing realizable net income.
Cost ratio -
Higher ratio implies less efficient management of
costs and so, lowers profits and less stability.
Earnings Return on (Average) Equity +
Higher profits strengthen asset side of balance
sheet and are a further cushion against bad loans.
Liquidity Ratio of Net Loans to Total Assets Ambiguous
Higher ratio implies higher income but increased
exposure to default risk.
Size
Logarithm of Total Assets +
Size of the bank is expected to have a non-linear
effect. Positive relation due to Economies of Scale
but only till a certain threshold.
Square of logarithm of Total Assets
-
Inflation
Annual percentage change in
Consumer Price Index
Ambiguous
Inflation will lead to higher profits and higher
costs so effect depends on the dominating effect.
Growth Real GDP growth rate +
Economic upturns are associated with higher
profits and lower non-performing loans.
Real interest rate Interest rate adjusted for inflation Ambiguous
Effect depends on dominating channel, i.e.
lending rate or deposit rate.
IB Market share Market share of Islamic banks +
A higher share of Islamic banks, in terms of Total
Assets should increase the stability in the financial
sector.
14. 13
The raison d'être for the explanatory variables holds roots to the commonly applied
CAMEL model which abbreviates to Capital, Asset quality, Management, Earnings and
Liquidity. These five elements are reviewed by credit rating agencies and regulatory bodies in
order to evaluate the performance of a bank and have formed the basis for the Financial
Soundness Indicators of the International Monetary Fund. The dimensions of the model are
applied as determinants of a banks Z-score.
Capital ratios attempt to quantify a bank’s financial position and assesses the ability of a
firm to withstand loss or liquidation. Maintaining sufficient capital stock allows banks to protect
themselves from unexpected losses and the Equity ratio is used to account for this. Asset, or
Loan, quality refers to the credit risk associated with a particular asset, i.e. any balance sheet
item that generates an income. A portfolio of outstanding but not received loan income is an
indication of poor asset quality and Loan Loss Reserve to Total Assets is used to represents this.
Due to its qualitative connotation, there has not been a consistent or straightforward method of
representing Management in empirical work. In attempt to capture the quality of management
decisions, the Cost to Income ratio is used as poor management will lead to unnecessarily high
costs. Earnings establish the capacity of a bank to fund its investment decisions and provide an
additional buffer for bad debts and are represented by Return on Equity. Liquidity ratios attempt
to measure the ability of a firm to pay off its short-term debts. The crisis demonstrated the
importance for banks of maintaining current assets to fulfil their immediate commitments and
Net Loans to Total Assets is used as its measure.
To account for the cost advantages from an increase in operational capacity, Size is also
included in the list of regressors and is represented by the logarithm (henceforth, log) of Total
Assets. The square of the log of Total Assets is used to reflect that these Economies of Scale tend
to reverse after a certain level. The state of the economy impacts the environment of the financial
market and the macroeconomic variables reflect the key economic indicators. These include the
growth rate of Real Gross Domestic Product, Inflation rate and Real interest rate. Table 3.1
below displays the descriptive statistics for the bank-specific variables employed for both the
Islamic banks and Conventional banks used in the sample, with Table 3.2 reporting the overall
summary statistics.
15. 14
Table 3.1: Summary Statistics for Islamic and Conventional samples
Variables
Islamic banks Conventional banks
Mean Std. dev Mean Std. dev
Z-score 3.019 8.598 3.565 8.475
Log Z-score 0.486 1.104 0.734 1.087
Equity ratio 9.374 20.142 6.057 10.372
Loan Loss Reserve 1.827 7.276 2.798 7.661
Cost ratio 22.217 51.758 21.999 37.109
Earnings 3.438 11.202 5.158 23.099
Liquidity 15.248 26.105 20.367 27.188
Ln (Assets) 4.853 6.739 5.999 7.036
Market share 0.008 0.039 0.016 0.051
Note: The mean and standard deviations of the internal characteristics of each type of bank is reported in this table. On average, both types of
banks have a similar Z-score in both log and levels, with Conventional banks having a relative better score. The mean of the Size variable shows
that Conventional banks are much larger than Islamic banks, which is further implied by the average Market share. Islamic banks have higher
costs, are less liquid and hold less capital stock than their Conventional peers.
Table 3.2: Summary statistics
Variable Observations Mean Std. Dev. Min Max
Log Z-score 9131 0.659 1.098 -4.653 5.699
Equity ratio 9131 7.059 14.142 -97.27 100.00
Loan Loss Reserve 9131 2.505 7.561 0.00 100.00
Cost Ratio 9131 22.065 42.075 0.00 950.00
Earnings 9131 4.638 20.269 -650.26 741.32
Liquidity 9131 18.820 26.966 0.00 109.14
Ln (Assets) 9131 5.653 7.158 0.00 19.01
(Ln (Assets))2
9131 83.193 109.318 0.00 361.32
Growth 9131 3.237 3.684 -13.127 30.012
Inflation 9131 4.8203 8.9959 -4.8633 132.824
Real Interest rate 9131 1.6301 4.8529 -24.6002 41.254
Market share 9131 0.0138 0.0479 0.00 0.9212
Note: This table reports the first and second moments, the minimum and maximum values for the bank-specific, macroeconomic and market
share variables. Data sources and definitions of the variables are mentioned in the main body of the dissertation.
16. 15
6. Methodology
The European Central Bank defines financial stability as “a condition in which the financial
system – intermediaries, markets and market infrastructures – can withstand shocks without
major disruption in financial intermediation and in the effective allocation of savings to
productive investment.” One such shock can be a bank run. Bank runs have the characteristic of
being contagious in that, speculations regarding the health of a particular bank or financial
institution can readily hinder the stability of another. Such was the case across the financial
crisis, whereby news regarding entities such as Lehman Brothers, Freddie Mac and Northern
Rock mushroomed not only across the United States but also abroad. The dissertation will use
this notion in an attempt to achieve its objective and captures this by using the Z-score.
The Z-score has become a popular measure of bank soundness. Traditionally, the statistical
Z-score measures the distance of an observation from the mean in terms of standard deviation,
allowing for a meaningful comparison of different samples of data. Its application has recently
been extended to finance literature, where the Z-score is interpreted as the number of standard
deviations below the mean the Return on Assets has to fall before equity is depleted. A financial
institution is classed as insolvent if its losses exceed the value of equity. The Z-score is
calculated as follows,
where, ROA – Return on (average) Assets
CAR – Capital Asset Ratio
sd (ROA) – Standard deviation of ROA (proxy for return volatility)
Its popularity has stemmed from its simplicity in terms of its calculation, where accounting
metrics are used rather than market data, and in terms of its relation with the probability of
insolvency; a higher Z-score implies lower probability of bank insolvency and in turn, a more
stable bank, vice-versa. Being composed of accounting data expands its application to various
groups of financial institutions including unlisted financial institutions but more importantly
Islamic banks, allowing for an objective analysis of the question at hand.
17. 16
However, Lepetit and Strobel (2015) amongst others extrapolate that the simple Z-score,
amidst its advantages, has an important flaw especially in regards to drawing inferences; it
suffers from a skewed distribution. The relationship between insolvency risk and the Z-score is
only valid based on the assumption that profits, or Return on Assets, are normally distributed.
This may not be the case and as a result, the Z-score has a skewed distribution. To address this,
the dissertation will modify the econometric model used in the literature by applying a
logarithmic transformation to the Z-score based on the practical work of Laeven and Levine
(2009) and findings of Lepetit and Strobel (2015). As robustness checks, the identical model will
be regressed but using the simple Z-score.
The framework advanced by Cihak and Hesse (2010) and Bourkhis and Nabi (2013) is
followed in which bank stability is modelled controlling for bank-specific and macroeconomic
characteristics. But instead of the simple Z-score, the logarithmic transformation is employed in
order to overcome any distributional issues attached to the measure. The variables of interest are
the interaction terms between the Islamic bank dummy and the Crisis period dummy (here, 2007-
2009) along with the market share of Islamic banks, which are both expected to have positive
coefficients.
Given the panel structure of the data, Pooled Ordinary Least Squares (POLS), Fixed Effect
and Random Effect estimation techniques will be considered. Past values of financial metrics
have been found to impact the current position of a bank (Athanasoglou et al., 2008) and to
account for this variation in the dependent variable, the bank-specific and macroeconomic
variables are lagged one period giving the following log-level model,
where, – Z-score for bank in country at time
- vector of bank-specific variables
18. 17
- vector of macroeconomic variables
- Islamic bank dummy (1 if Islamic, 0 otherwise)
- Crisis dummy (1 if 2007-2009, 0 otherwise)
– Market share of bank at time
- vector of year dummies
- vector of country dummies
The POLS estimation technique minimizes the squared residuals of the model in order to
provide the line of best fit and is adopted as a baseline regression in this analysis. However, there
are two key assumption underlying the technique which must be considered when interpreting
the results obtained. These are that the independent variables are uncorrelated with the
disturbance term, i.e. Е ( ' ) = 0, and the observations are homogenous, i.e. = . Given the
fact that different banks specialise in different business areas, concentrating on those that
generate higher profits given the needs of the customers and cost of raising finance, the
assumption of homogeneity is not a sensible one. An attempt to capture these differing
characteristics is made however, not all the individual effects are measurable and this
heterogeneity provides the foundation for exploiting other techniques.
Least Square Dummy Variable (LSDV), Fixed Effects and Random Effects are the most
common approaches when dealing with panel data. The LSDV approach is most effective when
the number of observations are not considerably larger than the period under consideration but
with the dataset comprising of 397 banks across 23 years, the technique is disregarded. Both the
Fixed Effect and Random Effect techniques acknowledge the heterogeneity amongst
observations but differ in its treatment; the former introduces the diversity through dummy
variables for each observation whereas the latter includes it in the innovation term. That is, Fixed
Effects assumes the heterogeneity is correlated with other regressors whereas Random Effects
assumes heterogeneity is uncorrelated with other independent variables. Given both methods are
applicable to most work using panel data, the Hausman test is conducted in order to determine
the most appropriate. The results are given in Table 4.1 and infer that the individual effects do
not meet the exogeneity requirement needed for the Random Effects, so the Fixed Effects
estimation should be adopted. The Fixed Effects technique removes the heterogeneity by
19. 18
demeaning the data, i.e. deducts the mean from each observation. Given the time-invariant nature
of the country dummies, they are automatically dropped in the regressions.
Table 4.1: Hausman test results
Hypothesis Prob>chi2 FE or RE?
: [ ′ ]=0 or no correlation 0.0000 FE
To be able to draw correct inferences from the results of the regressions, it is fundamental
that the variance of the errors is time-invariant. In order to test whether the errors are
heteroskedastic, the Bruesh-Pagan test is run. The results, given in Table 4.2, show the variance
suffers from heteroskedasticity. The presence of this invalidates the inferences drawn from the
hypothesis tests however, by using the command robust in STATA, this can be corrected for.
Table 4.2: Breusch-Pagan test for heteroskedasticity
Hypothesis Prob>chi2 Heteroscedasticity?
: 0.0000 Yes
20. 19
7. Empirical results
Four specifications of the model are considered; the first containing only bank-specific
characteristics, the second including macroeconomic variables and the third introducing the
variables of interest, i.e. the Islamic bank-Crisis interaction term and Islamic bank market share.
In order to dwell deeper into the issue at hand, the interaction term is divided amongst the three
central years of the financial crisis, giving the fourth specification of the model. The results from
the Fixed Effects estimation are displayed in Table 5.2 and those drawn from the final two
specifications are analysed in the following.
From the penultimate model, the coefficient on Cost to Income ratio is expected to have a
negative sign as higher costs relative to the bank earnings puts the bank, Islamic or
Conventional, in a financial predicament and in turn, reduces its robustness. The results for the
variable also suggest such a relation however, are statistically insignificant at the 10%
significance level. Increments to the Loan Loss Reserves, as expected, reduce the log Z-score but
the opposite is indicated for Net Loans to Total Assets. That is, a more liquid position is
beneficial to the stability of a bank as the revenues generated exceed the default risk from the
increase in lending. The coefficients on both variables are insignificant. A higher capital stock
improves the log Z-score of a bank and similarly, so does Earnings, both being statistically
significant. The results on the Size variables demonstrate the existence of Economies of Scale,
i.e. larger banks have higher profits and are more stable but only till a certain threshold. The sign
of the coefficients on log of Total Assets and the Square of the log of Total Assets are positive
and negative respectively, but only the coefficient on the former is statistically significant.
A more prosperous economy is commonly viewed as an important factor for the prosperity of
the financial market and using Real GDP Growth and Inflation as measures of the outlook of a
country, we find this notion holds. Real GDP Growth and the log Z-score have a positive and
significant relation according to the data and conversely, Inflation has an inverse but statistically
insignificant relation. The Real Interest rate impacts the log Z-score via two channels; the
lending rate and the deposit rate. Some countries in the sample7
follow a pegged system and so
interest rates in those countries will follow the rates set by the Federal Reserve. Nevertheless, the
7
Saudi Arabia, UAE, Bahrain and Qatar
21. 20
results suggest the second channel is dominant such that increases in the real interest rate lowers
the stability of a bank, with the coefficient being statistically significant at the 10% level.
Despite the theoretical vigour of the Islamic banking model, the results obtained from the
third specification of the model fail to support this structural advantage across the financial
crisis. The interaction between the Islamic bank dummy and Crisis dummy has a negative
coefficient, implying that Islamic banks were also prone to the effects of the crisis but the result
is statistically insignificant.
Separating the interaction term to account for each of the three years of the crisis in the final
specification, the results suggest the opposite for the variables of interest. Islamic banks are
found to have been adversely impacted in the run up to the crisis but withstood the shocks when
the crisis was in full effect, with the results being statistically significant for 2007 but
insignificant for 2008 and 2009. Considering the implications of the market shares of Islamic
banks on the stability of individual banks, the results suggest that a financial sector with a higher
proportion of Islamic banks is less likely to create vulnerability in the performance of individual
banks. The results however, are insignificant even at the 10% level. In respect to the bank-
specific and macroeconomic variables, the same results and inferences are obtained from the
final specification.
In order to test the robustness of the results, a contemporaneous version of all specifications
of the model are analysed and the results are tabulated in Table 5.3. Other than the coefficient on
Cost-to-Income variable becoming positive but still insignificant, the remaining results hold.
Furthermore, the model is estimated using the simple Z-score, the results of which are reported
in Table 5.4. The R-squared of the model is considerably less than the model considered and
contrary to the results of the final specification, using the simple Z-score generates a positive and
insignificant coefficient on the Islamic bank-Crisis interaction dummy. When distinguishing
between each of the years of the crisis, the results mirror those produced using the log
transformation of the Z-score.
22. 21
8. Discussion
According to the final specification of the model, the results obtained for the bank-specific
and macroeconomic variables are in accordance to the expectations in place and it may be argued
that Islamic banks endured the shockwaves originated in the Western economies.
The hypothesis of whether being an Islamic bank during the financial crisis enhanced the
stability of a bank or not is tested along with whether a larger share of Islamic banks in the
financial market improves stability. The statistically significant negative coefficient on the 2007
Islamic bank interaction term indicates an initial impact of the crisis on the sample group.
However, the insignificant results on the 2008 and 2009 Islamic bank interaction terms compels
one to draw the inference that the stability of Islamic banks was not affected by the financial
crisis.
Being the first such episode encountered by Islamic banks, the lack of experience coupled
with the complexity of the new products could be attributed to the negative coefficient on the
2007 Islamic bank interaction term. The uniqueness of the Islamic banking model opens it up to
risks other than those faced by its Conventional peers, which in a mixed industry, have been a
challenge to identify let alone manage. This inexperience has hindered Islamic banks in
implementing suitable risk management strategies and many have applied either conventional
risk management techniques or variations of these strategies in attempt to manage these unique
risks (Salem, 2013), providing the basis for such results.
A larger presence of Islamic banks in the financial market is expected to create a more
tranquil financial environment but the statistically insignificant results indicate that a financial
market concentrated with Islamic banks does not improve, nor worsen, stability. This could be
due to an absence of relevant and effective regulation or a divergence of Islamic bank practises
from its model.
Chapra and Khan (2000) note that for a continuation of the expansion of the Islamic banking
sector, reforms to the regulatory and supervisory framework are key along with entities
supporting the functions of the bank; in particular, private credit rating agencies. These agencies
will facilitate the management of risks in the more risky modes of financing, i.e. Mudarabah and
Musharaka, improving profitability and curtailing moral hazard. Since their report, multiple
23. 22
rating agencies in Muslim countries have commenced operations8
which could be the root to the
rapid recovery noted in the World Islamic Banking Competitiveness Report 2013/14 by EY.
The debate concerning the harmony between the theoretical model and the practises of
Islamic banks has been an on-going one. Many have critiqued the Islamic banking model and
argued that apart from a change in terminology, they are not any different to their Conventional
counterparts (e.g. Kuran, 1993, 2004) whereas supporters of the model contend that such a
scenario was only possible in the transition away from the conventional system (Ahmed, 1993).
With the verses regarding trade revealed over 4000 years ago, applying them to the current
system has not been a simple task and this has been the main reason for inconsistencies in the
practises among Islamic banks. The rulings on Riba (interest) and gharar (uncertainty) have been
subject to varying interpretations, with some viewing the relevant verses as a prohibition of
interest in its entirety whereas for others they signify a restriction from “excessive” interest. Due
to this, the results may not have reflected the expectations of the variables of interest.
It has been argued that a majority of the Islamic banking contracts were collateralised by real
estate in accordance to the materiality principle and this exposed Islamic banks to the “second-
round effects” of the crisis (Hasan and Dridi, 2010). This concentration of credit exposed Islamic
banks to the economic downturn in the real economy. Issues with data availability, particularly
with Islamic banking income, restricted the calculation of an Income Diversification variable
which would have tested whether a more diversified portfolio improves the stability of a bank or
not.
Even with the efforts to control for any shortcomings, the results must be reviewed with
caution as the study has its limitations. The major weakness, as is the case with the majority of
empirical work, is in regards to the quality and quantity of the data. Despite being a reputable
and frequently sourced database, the data compiled by Bankscope is drawn from the financial
statements published by banks (and other financial institutions) which may suffer from reporting
bias. With differences in auditing and reporting regulations across countries, the accounts may
not reflect the actual stance of the bank. In terms of the quantity of data, Bankscope offers the
general user data for only the most recent 16 years available which varies for every bank. Data
for some banks range from 2015 back but for others start from 2007, resulting in discrepancies in
8
Mainly International Islamic Rating Agency (IIRA).
24. 23
the results. This mis-match in available data was addressed by expanding the timeframe from 16
to 23 years however, this resulted in additional missing values, augmenting the potential omitted
variable bias.
9. Conclusion
This dissertation analyses the premise that Islamic banks play a key role in the stability of the
financial sector. In particular, the extra element of safety drawn from the principles underlying
the Islamic banking model are questioned using the Great Depression as the period of distress.
Additionally, whether or not a larger presence of Islamic banks in the financial market translates
to a more stable environment is also examined.
Employing the Fixed Effects estimation technique, the results suggest that the benefits of the
Islamic banking model are not present in Islamic financial institutions. According to the results,
there was no definite improvement in the log Z-score of Islamic banks across the crisis nor was
there a positive influence from a more concentrated Islamic financial market. Contrary to the
general view, the dissertation concludes that the Islamic banking model is not any more robust
than the Conventional model and attributes this to the deviation of Islamic financial institutions
from their theoretical model.
Given the various interpretations of the word Riba, further study in the area could focus on
classifying groups of Islamic banks that specify their practises according to a particular
definition in order to determine the robustness of the Islamic banking model. Alternatively,
attempts at conducting a meta-analysis between a country with a fully Islamic financial system
and one without an Islamic Banking and Finance presence may also provide a useful perspective
to the argument. All things considered, the transition away from a financial system with a deep-
rooted history may prove to be too large of a step for the international community nevertheless,
the growth of Islamic Banking and Finance cannot be overlooked and embracing some of its key
features may prove to be pivotal for the state of the global financial system.
25. 24
Appendix:
Note: This table presents the coefficient and t-statistics for the fourth specification of the model using POLS, Fixed Effect and Random Effects techniques. A significance level of <1% is
denoted by 3 stars, 1-5% by 2 stars and 5-10% by 1 star. POLS assumes homogeneity and so the results must not be taken at face value. The fixed effects and random effects addresses
the heterogeneity amongst the banks in their respective treatment methods.
Table 5.1: Regressions Results
(Dependent variable: Log Z-score)
Pooled OLS Fixed effect Random effect
Variable Coefficient t Coefficient t Coefficient Z
Equity (-1) 0.0076*** 6.09 0.0081*** 4.39 0.0079*** 4.00
LLR (-1) -0.0017 -0.74 -0.0026 -0.89 -0.0023 -0.78
Cost-Income Ratio (-1) -0.0009* -1.91 -0.0004 -1.02 -0.001 -1.20
Earnings (-1) 0.0009 1.46 0.001* 1.72 0.001* 1.71
Liquidity (-1) 0.0014 1.11 0.0004 0.20 0.0007 0.33
Ln (Assets) (-1) 0.0997*** 6.47 0.1053*** 4.27 0.1022*** 4.22
(Ln (Assets))2
(-1) -0.0008 -0.99 -0.0016 -1.07 -0.0013 -0.88
Growth (-1) 0.0172*** 4.43 0.0178*** 4.27 0.0176*** 4.81
Inflation (-1) -0.0049 -0.83 -0.0004 -0.32 -0.0005 -0.41
Real Interest rate (-1) -0.0049** -2.37 -0.0041* -1.89 -0.0043** -2.00
Islamic bank Crisis1 -0.3157** -2.69 -0.2137* -1.94 -0.2466** -2.22
Islamic bank Crisis2 -0.0017 -0.01 0.0916 0.82 0.0617 0.55
Islamic bank Crisis3 -0.1017 -0.88 -0.0094 -0.09 -0.0389 -0.37
Islamic bank share -1.4361** -2.22 0.322 0.87 -0.2626 -0.60
Constant 0.1179 1.80 0.1625 2.62 0.2027 2.33
Observations 8733 8733 8733
R-squared 0.5477 0.5172 0.6973
F 343.74 103.48 6403.12
Prob > F 0.0000 0.0000 0.0000
26. 25
Note: This table presents the results from the Fixed Effects estimation on the four specifications of the model. Given the log-level structure of the model, the coefficients are interpreted as
the percentage change in the dependent variable from a unit change in the regressor, after multiplying the coefficient by 100. Column 1 reports the results from the specification comprising
bank-specific variables only, Column 2 includes macroeconomic variables, Column 3 introduces the Islamic bank-Crisis interaction term along with the Islamic bank market share and
finally, Column 4 divides the Islamic bank-Crisis term across the three years of the crisis. The significance levels are * 0.05 < p-value ≤ 0.10; **: for 0.01 < p-value ≤ 0.05; ***: for p-
value ≤ 0.01.
Table 5.2: Fixed-effect Results
(Dependent variable: Log Z-score)
Fixed effect [1] Fixed effect [2] Fixed effect [3] Fixed effect [4]
Variable Coefficient t Coefficient t Coefficient t Coefficient t
Equity (-1) 0.0084*** 4.54 0.0081*** 4.36 0.0081*** 4.41 0.0081*** 4.39
LLR (-1) -0.0025 -0.86 -0.0025 -0.87 -0.0026 -0.88 -0.0026 -0.89
Cost-Income Ratio (-1) -0.0005 -1.02 -0.0005 -1.00 -0.0005 -1.01 -0.0005 -1.02
Earnings (-1) 0.001* 1.84 0.0009* 1.71 0.001* 1.72 0.001* 1.72
Liquidity (-1) 0.0007 0.32 0.0004 0.19 0.0004 0.19 0.0004 0.20
Ln (Assets) (-1) 0.1015*** 4.10 0.1047*** 4.25 0.1055*** 4.28 0.1053*** 4.27
(Ln (Assets))2
(-1) -0.0014 -0.92 -0.0016 -1.04 -0.0016 -1.08 -0.0016 -1.07
Growth (-1) - - 0.0176*** 4.22 0.0177*** 4.25 0.0178*** 4.27
Inflation (-1) - - -0.0003 -0.29 -0.0003 -0.29 -0.0004 -0.32
Real Interest rate (-1) - - -0.0003 -0.29 -0.0041* -1.92 -0.0041* -1.89
Islamic bank Crisis - - - - -0.0439 -0.51 - -
Islamic bank share - - - - 0.334 0.91 0.322 0.87
Islamic bank Crisis1 - - - - - - -0.2137* -1.94
Islamic bank Crisis2 - - - - - - 0.0916 0.82
Islamic bank Crisis3 - - - - - - -0.0094 -0.09
Constant 0.4896 8.13 0.1612 2.60 0.1628 2.62 0.1625 2.62
Observations 8733 8733 8733 8733
R-squared 0.5176 0.5189 0.5167 0.5172
F 113.29 112.82 109.56 103.48
Prob > F 0.0000 0.0000 0.0000 0.0000
27. 26
Note: This table presents the results of the same regression but using the current time period of the independent variables. The sign of the coefficients on the independent variables mirrors those
in the lagged model, apart from that on the Cost to Income ratio. Again, * for 0.05 < p-value ≤ 0.10; ** for 0.01 < p-value ≤ 0.05; *** for p-value ≤ 0.01.
Table 5.3: Robustness Checks – Contemporaneous model
(Dependent variable: Log Z-score)
Fixed effect [1] Fixed effect [2] Fixed effect [3] Fixed effect [4]
Variable Coefficient t Coefficient t Coefficient t Coefficient t
Equity 0.0039** 2.90 0.0037** 2.73 0.0037** 2.81 0.0037** 2.82
LLR -0.0104** -2.80 -0.011** -2.85 -0.0107** -2.90 -0.0107** -2.89
Cost-Income Ratio 0.00002 0.04 0.00003 0.05 0.00002 0.03 0.00002 0.03
Earnings 0.00001 0.04 -0.0001 -0.18 -0.0001 -0.32 -0.0001 -0.34
Liquidity -0.0018 -0.73 -0.002 -0.82 -0.0021 -0.85 -0.0021 -0.84
Ln (Assets) 0.155*** 5.36 0.157*** 5.47 0.157*** 5.46 0.157*** 5.46
(Ln (Assets))2
-0.0027 -1.64 -0.0028* -1.73 -0.0037* -1.67 -0.0027* -1.67
Growth - - 0.012** 2.84 0.012** 2.85 0.0121** 2.90
Inflation - - -0.0017 -1.41 -0.0017 -1.39 -0.0017 -1.38
Real Interest rate - - -0.0022 -0.94 -0.0021 -0.93 -0.0019 -0.88
Islamic bank Crisis - - - - -0.0571 -0.67 - -
Islamic bank share - - - - -1.1073 -1.47 -1.115 -1.47
Islamic bank Crisis1 - - - - - - -0.1949* -1.82
Islamic bank Crisis2 - - - - - - 0.1041 1.05
Islamic bank Crisis3 - - - - - - -0.0815 -0.75
Constant -0.0003 -0.02 -0.0003 -0.02 -0.0003 -0.02 -0.0003 -0.02
Observations 9130 9130 9130 9130
R-squared 0.5385 0.5419 0.5537 0.5539
F 148.03 138.09 131.64 125.52
Prob > F 0.0000 0.0000 0.0000 0.0000
Table 5.4: Robustness Checks
(Dependent variable: Simple Z-score)
28. 27
Note: This table presents the results of the same regression but using the simple Z-score as the dependent variable. A considerable difference in the R-squared can be observed. Again, * for 0.05 < p-value ≤
0.10; ** for 0.01 < p-value ≤ 0.05; *** for p-value ≤ 0.01.
Fixed effect [1] Fixed effect [2] Fixed effect [3] Fixed effect [4]
Variable Coefficient t Coefficient t Coefficient t Coefficient t
Equity (-1) 0.113*** 4.98 0.111*** 4.83 0.109*** 4.82 0.109*** 4.82
LLR (-1) 0.0065 0.16 0.0057 0.14 0.0072 0.18 0.0071 0.17
Cost-Income Ratio (-1) -0.0057 -1.17 -0.0057 -1.16 -0.0054 -1.11 -0.0054 -1.11
Earnings (-1) 0.0018 0.60 0.001 0.34 0.0012 0.39 0.0012 0.39
Liquidity (-1) -0.0209 -0.85 -0.0231 -0.93 -0.0228 -0.91 -0.0226 -0.90
Ln (Assets) (-1) 1.358*** 5.03 1.385*** 5.13 1.378*** 5.11 1.376*** 5.11
(Ln (Assets))2
(-1) -0.064*** -3.71 -0.066*** -3.80 -0.066*** -3.80 -0.066*** -3.80
Growth (-1) - - 0.125*** 3.93 0.121*** 3.76 0.121*** 3.79
Inflation (-1) - - -0.0099 -1.29 -0.0098 -1.26 -0.0099 -1.29
Real Interest rate (-1) - - -0.0285 -1.63 -0.0278 -1.58 -0.0274 -1.55
Islamic bank Crisis - - - - 1.2089 1.46 - -
Islamic bank share - - - - 4.426** 2.06 4.334** 2.06
Islamic bank Crisis1 - - - - - - 0.0011 0.00
Islamic bank Crisis2 - - - - - - 1.9746 1.64
Islamic bank Crisis3 - - - - - - 1.6524 1.50
Constant 2.6173 4.98 1.7808 1.80 1.7781 1.79 1.7763 1.79
Observations 8733 8733 8733 8733
R-squared 0.2764 0.2790 0.2694 0.2698
F 50.99 49.76 46.85 44.71
Prob > F 0.0000 0.0000 0.0000 0.0000
29. 28
Table 6: Islamic banking products and services
Term Meaning Explanation
Amana Safekeeping Money deposited for safekeeping which earn no return
Bay’ al-salam Advance cash purchase Buyer makes a payment in advance but the delivery of
the good is made at a later date
Bay’ bithaman ajil Deferred payment sale Sale contract in which buyer makes a payment, either
lump-sum or instalments, after the sale together with a
mark-up
Ijara Leasing One party purchases an asset and another is given the
right to use it but the lessor retains ownership
Istina Deferred payment and delivery Sale contract in which a manufacturer/contractor
agrees to produce/build a certain agreed
product/building at a given price in the future, where
the price can be paid at a later date and in instalments,
depending on preferences of the parties
Ju’ala Service charge Contract to perform a specific task in a given time for
a fee
Muradabah Mark-up financing Agreement in which one party purchases a good
desired by another and sells it to them at a price which
includes a profit agreed to by both parties
Wakalah Agency Contract Contract in which one party (Muwakil) appoints
another (Wakeel) to conduct a certain task on behalf of
the principal, for a fixed commission
Qard Hassana Beneficence loans Loans without interest and profit-sharing
30. 29
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