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Are Islamic Banks Sufficiently Diversified? An Empirical Analysis of Eight Islamic Banks in Malaysia

Author

Listed:
  • CHATTI , MOHAMED ALI

    (Islamic Development Bank)

  • KABLAN, SANDRINE

    (ERUDITE, UPEC, (France))

  • YOUSF, OUIDAD

    (University of Montpellier, France)

Abstract

The aim of this study is to analyze the diversification among financial activities of Islamic banks and how it affects banks performance. We used the Herfindahl-Hirschman Index (HHI) to measure the degree of asset/liability diversification and risk-adjusted performance as criteria of assets allocation and management compensation. We found that retail and commercial activity are the most profitable activity, which lead to an overinvestment in those activities. Some banks show high average correlation between commercial and retail activities, and corporate and investment activities. The analysis of the efficiency shows that none of these banks falls on the frontier which means that they should change the structure of their portfolio in order to become less concentrated. They should also allocate more assets to treasury activity.

Suggested Citation

  • Chatti , Mohamed Ali & Kablan, Sandrine & Yousf, Ouidad, 2013. "Are Islamic Banks Sufficiently Diversified? An Empirical Analysis of Eight Islamic Banks in Malaysia," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 21, pages 23-54.
    • Handle: RePEc:ris:isecst:0010
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    References listed on IDEAS

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    Cited by:

    1. Chen, Naiwei & Liang, Hsin-Yu & Yu, Min-Teh, 2018. "Asset diversification and bank performance: Evidence from three Asian countries with a dual banking system," Pacific-Basin Finance Journal, Elsevier, vol. 52(C), pages 40-53.
    2. Salma Zaiane & Fatma Ben Moussa, 2021. "What Drives Banking Profitability During Financial Crisis and Political Turmoil? Evidence from the MENA Region," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 13(3), pages 380-407, September.

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