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Impact of banking regulation on risk and efficiency in Islamic banking

Author

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  • Nafis Alam

Abstract

Purpose - This paper aims to examine whether bank regulation, supervision and monitoring enhance or impede technical efficiency and risk‐taking behaviour of Islamic banks across the globe. Design/methodology/approach - Technical efficiency scores are calculated using the data envelopment analysis (DEA) model while simultaneity between banks' supervision and regulation on risk and efficiency estimates are calculated using the seemingly unrelated regression (SUR) approach. Findings - The author's results suggest that regulations and strict monitoring of banking operation, and higher supervisory power of the authorities, increase the technical efficiency for Islamic banks. The opposite effect is observed in the case of risk‐taking behaviour of Islamic banks, with higher restrictions resulting in a reduction in risk taking of Islamic banks. Research limitations/implications - The Basel II & Basel III guidelines suggested that stricter regulations and supervision could hamper banking efficiency. The existence of a powerful supervisory body could also lead to the inefficiency of banks. The DEA scores from this paper suggest that this may not necessarily be the case, especially as Islamic banks appear to be technically efficient in stricter regulatory conditions. Originality/value - A message that emerges from this analysis is that there is a strong link between Islamic bank technical efficiency and risk‐taking behaviour with the Central Bank regulatory and supervisory policies. It is also conclusive that the Islamic banking system works well within a stricter regulatory environment.

Suggested Citation

  • Nafis Alam, 2013. "Impact of banking regulation on risk and efficiency in Islamic banking," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 11(1), pages 29-50, June.
    • Handle: RePEc:eme:jfrapp:v:11:y:2013:i:1:p:29-50
    DOI: 10.1108/JFRA-03-2013-0010
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    Citations

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    Cited by:

    1. Louhichi, Awatef & Boujelbene, Younes, 2017. "Bank capital, lending and financing behaviour of dual banking systems," Journal of Multinational Financial Management, Elsevier, vol. 41(C), pages 61-79.
    2. Shumaila Zeb & Abdul Sattar, 2017. "Financial Regulations, Profit Efficiency, and Financial Soundness: Empirical Evidence from Commercial Banks of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 56(2), pages 85-103.
    3. Ranjeeta Nayak, 2021. "Banking regulations: do they matter for performance?," Journal of Banking Regulation, Palgrave Macmillan, vol. 22(4), pages 261-274, December.
    4. Hassan, M. Kabir & Aliyu, Sirajo, 2018. "A contemporary survey of islamic banking literature," Journal of Financial Stability, Elsevier, vol. 34(C), pages 12-43.
    5. Nupur Moni Das & Bhabani Sankar Rout, 2020. "Banks’ capital adequacy ratio: a panacea or placebo," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 47(3), pages 303-318, September.
    6. Ljerka Cerovic & Stella Suljic Nikolaj & Dario Maradin, 2017. "Comparative Analysis Of Conventional And Islamic Banking: Importance Of Market Regulation," Economic Thought and Practice, Department of Economics and Business, University of Dubrovnik, vol. 26(1), pages 241-263, june.

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