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Integrated early warning prediction model for Islamic banks: the Malaysian case

Author

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  • Jaizah Othman

    (Durham University)

  • Mehmet Asutay

    (Durham University)

Abstract

It is increasingly becoming important to predict the performance of Islamic banks in order to anticipate a problem before it materializes and negatively affects banks’ performance and financial standing. Benefiting from the earlier research on the subject, this study aims to develop a preliminary integrated early warning model for Islamic banks in Malaysia to assess their financial standing by using quarterly data for the 2005–2010 period. Factor analysis and three parametric models (discriminant analysis, logit analysis, and probit analysis) are used in this study. Out of 29 variables used in the early stage of study, only 13 were selected as predictor variables in this study. Results show that, overall, classification accuracy is relatively high in the first few quarters before the benchmark quarter (2010 Q3) for all the estimated models. Correct classification rates are high during the first few quarters and decrease subsequently. Based on these results, therefore, it is obvious that the first few quarters before the benchmark quarter are the most important for making a correct prediction. These results show the predictive ability of the integrated model to differentiate healthy and non-healthy Islamic banks, thus reducing the expected cost of bank failure.

Suggested Citation

  • Jaizah Othman & Mehmet Asutay, 2018. "Integrated early warning prediction model for Islamic banks: the Malaysian case," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(2), pages 118-130, April.
    • Handle: RePEc:pal:jbkreg:v:19:y:2018:i:2:d:10.1057_s41261-017-0040-5
    DOI: 10.1057/s41261-017-0040-5
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    References listed on IDEAS

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    Cited by:

    1. Ghlamallah, Ezzedine & Alexakis, Christos & Dowling, Michael & Piepenbrink, Anke, 2021. "The topics of Islamic economics and finance research," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 145-160.
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    3. Simona Franzoni & Asma Ait Allali, 2024. "Corporate governance of Islamic banks: a sustainable model to protect the participatory depositor?," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(1), pages 42-48, March.

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