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Moral hazard and risk-taking incentives in Islamic banks, does franchise value matter!

Author

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  • Mehdi Mili
  • Sami Abid

Abstract

Purpose - This paper aims to examine risk-taking in Islamic banks by exploring moral hazard and owner/manager agency problems simultaneously. Design/methodology/approach - The authors propose to estimate a model of bank risk-taking that includes both franchise value and ownership structure as explanatory factors of bank risk. Findings - The results show that franchise value is an important determinant of Islamic bank risk-taking. Banks with high franchise values are less likely to take risks than banks with low franchise value. In contrast, outside block holders have, at best, limited influences on bank risk-taking. Originality/value - This paper conducts the first empirical examination of the relationship between managerial risk preferences and Islamic banks ownership. The authors examine simultaneously the effect of franchise value and owner/manager problem on Islamic bank risk taking behavior. They consider separately the impact on total risk, systematic risk and bank specific risk.

Suggested Citation

  • Mehdi Mili & Sami Abid, 2017. "Moral hazard and risk-taking incentives in Islamic banks, does franchise value matter!," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 10(1), pages 42-59, April.
    • Handle: RePEc:eme:imefmp:imefm-12-2015-0148
    DOI: 10.1108/IMEFM-12-2015-0148
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    More about this item

    Keywords

    Islamic banks; Ownership structure; Bank risk-taking; Franchise value; C26; G21; G28; G30;
    All these keywords.

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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