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Investment deposits, risk‐taking and capital decisions in Islamic banks

Author

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  • Hichem Hamza
  • Zied Saadaoui

Abstract

Purpose - This paper aims to examine the relationship between the volume of investment deposits and capitalization of Islamic commercial banks. Design/methodology/approach - Unlike current accounts holders, investment accounts holders may support part or all of the losses on assets value, which could be a source of moral hazard among bank managers and shareholders. To test these assumptions, the authors use the system generalized method of moments (system GMM) on a dynamic panel of 59 Islamic banks observed during the period 2005‐2009. Findings - After controlling for a set of variables that may influence capital level, the results show a significant negative relationship between PSIA and regulatory capital ratio. This may indicate that the specific nature of PSIA can be a source of excessive risk‐taking in Islamic banks. This behavior is likely to threaten the solvency of Islamic banks and shows that some deficiencies may exist in their risk management and governance system. Practical implications - This paper suggests some recommendations to better implement the principle of profit and loss sharing and to curb excessive risk‐taking in Islamic banks. Originality/value - The originality of this paper is to give empirical responses to theoretical assumptions of a relationship between PSIA and moral hazard in Islamic banks.

Suggested Citation

  • Hichem Hamza & Zied Saadaoui, 2013. "Investment deposits, risk‐taking and capital decisions in Islamic banks," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 30(3), pages 244-265, July.
  • Handle: RePEc:eme:sefpps:v:30:y:2013:i:3:p:244-265
    DOI: 10.1108/SEF-Feb-2012-0016
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    Citations

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    Cited by:

    1. Yomna Daoud & Aida Kammoun, 2020. "Financial Stability and Bank Capital: The Case of Islamic Banks," International Journal of Economics and Financial Issues, Econjournals, vol. 10(5), pages 361-369.
    2. Hamza, Hichem & Saadaoui, Zied, 2018. "Monetary transmission through the debt financing channel of Islamic banks: Does PSIA play a role?," Research in International Business and Finance, Elsevier, vol. 45(C), pages 557-570.
    3. Hassan, M. Kabir & Aliyu, Sirajo, 2018. "A contemporary survey of islamic banking literature," Journal of Financial Stability, Elsevier, vol. 34(C), pages 12-43.
    4. Zheng, Changjun & Moudud-Ul-Huq, Syed & Rahman, Mohammad Morshedur & Ashraf, Badar Nadeem, 2017. "Does the ownership structure matter for banks’ capital regulation and risk-taking behavior? Empirical evidence from a developing country," Research in International Business and Finance, Elsevier, vol. 42(C), pages 404-421.
    5. Meslier, Céline & Risfandy, Tastaftiyan & Tarazi, Amine, 2020. "Islamic banks’ equity financing, Shariah supervisory board, and banking environments," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    6. Mr. Saeed Al-Muharrami & Mr. Daniel C Hardy, 2013. "Cooperative and Islamic Banks: What can they Learn from Each Other?," IMF Working Papers 2013/184, International Monetary Fund.
    7. Anggraeni Anggraeni & Yulis Maulida Berniz, 2022. "The effect of asset quality, profit and loss sharing on Sharia Banking Liquidity in Indonesia," Technium Social Sciences Journal, Technium Science, vol. 27(1), pages 423-436, January.
    8. Bitar, Mohammad & Madiès, Philippe & Taramasco, Ollivier, 2017. "What makes Islamic banks different? A multivariate approach," Economic Systems, Elsevier, vol. 41(2), pages 215-235.

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