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Risk‐taking behaviour of Islamic banks: application of prospect theory

Author

Listed:
  • Nafis Alam
  • Kin Boon Tang

Abstract

Purpose - The paper aims to gain an insight into behavioural characteristics of Islamic banks and how they influence the risk‐taking decisions of Islamic banks in financial markets within the prospect theory context. Design/methodology/approach - The study employs review and application of prospect theory in Islamic banking industry across the globe, making use of 99 Islamic banks across 14 countries. Findings - Empirical evidence shows that Islamic banks located above target risk level tend to show risk‐adverse behaviour, while banks below target risk level inclined towards risk‐seeking attitude. Results also highlighted that banks which have higher loans to total asset ratio tend to take on lower risk. Practical implications - Islamic bank regulators will be better prepared to monitor the Islamic banking system if they understand risk‐taking behaviour of Islamic bank managers. The findings will provide more effective bank regulatory oversight, thus preventing Islamic bank failures in future. Originality/value - Since there are relatively few studies conducted in risk‐taking behaviour of Islamic banks, specifically global Islamic banking, this study will broaden the scope of the literature by providing novel empirical evidence on risk‐taking practice of Islamic banks worldwide.

Suggested Citation

  • Nafis Alam & Kin Boon Tang, 2012. "Risk‐taking behaviour of Islamic banks: application of prospect theory," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 4(2/3), pages 156-164, August.
  • Handle: RePEc:eme:qrfmpp:v:4:y:2012:i:2/3:p:156-164
    DOI: 10.1108/17554171211252493
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    Citations

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    Cited by:

    1. Huang, Jia & Chen, Zheng, 2021. "Optimal risk asset allocation of a loss-averse bank with partial information under inflation risk," Finance Research Letters, Elsevier, vol. 38(C).
    2. Ben Salah Mahdi, Ines & Boujelbène Abbes, Mouna, 2018. "Behavioral explanation for risk taking in Islamic and conventional banks," Research in International Business and Finance, Elsevier, vol. 45(C), pages 577-587.
    3. Yousra Trichilli & Hana Kharrat & Mouna Boujelbène Abbes, 2021. "Prospect theory and risk-taking behavior: an empirical investigation of Islamic and conventional banks," Journal of Asset Management, Palgrave Macmillan, vol. 22(3), pages 163-178, May.

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