A comparison of the impact of the Basel standards upon Islamic and conventional bank risks in the Gulf state region

Abstract

Purpose This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed Islamic and conventional banks in the Gulf Cooperation Council (GCC) region. Design/methodology/approach The authors introduce a market-based measure of bank stress and test this indicator against the Tier 1 Capital Ratio using Granger causality tests. Findings The authors find that the market-based measure is a leading indicator of banking stress when compared to the accounting-based Tier 1 ratio and thus is relevant to the Basel regulation’s Pillar 3. Research limitations/implications This paper only looks at Islamic vs conventional banks in the Gulf region, and the authors would like to extend this analysis to a broader range of financial institutions, especially in the European and North American markets. Social implications Developing a measure that signals bank stress ahead of typically used measures can help regulators, bank management and investors identify oncoming problems and issues before these become too big to manage. Originality/value The results from this analysis provides insight into the offsetting impact from two drivers (beta and book-to-market ratio) of the cost of equity capital for the conventional vs Islamic banking sectors.

Does Islamic Banking Promote Financial Stability? Evidence From an Agent-Based Model

“…These studies proliferated after the GFC and provide mixed results. Farooqi and O'Brien (2019) indicate that Islamic banks have lower operating risk and higher market risk compared to conventional ones in the Gulf State region, while Mohammad, Asutay, Dixon & Platonova (2020) and Abdel Megeid (2017) find higher liquidity risk for Islamic banks. With regard to credit risk, Ferhi (2018), Chamberlain, Hidayat & Khokhar (2020), Chamberlain et al (2020), and Akram and Rahman (2018) find that this is lower for Islamic banks.…”

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“…In addition to Porter's five powers, external barriers to growth may originate in low item interest or client management, difficult access to raw materials, late payments of invoices by commercial customers., the impedance of the government, the public procurement guidelines, and the challenges to negotiate. Article to different parts of the world due to the principles and guidelines (Farooqi & O'Brien, 2019). https://dx.doi.org/10.30566/ijo-bs/2022.06.89 2600-8254/© 2018 All rights reserved by IJO-BS.…”

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“…Thus, two new regulatory bodies are created, the Financial Stability Board (CEF) and the Consumer Protection Agency (CFP, for its acronym in English Bureau of Consumer Financial Protection). The CEF was created with the objective of identifying and responding to emerging risks throughout the financial system, advising the Federal Reserve (FED) on the identification of those entities that pose a high systemic risk and facilitating the exchange of information and coordination (Farooqi and O'Brien 2019).…”

“…The importance of banking for the functioning of the economy and the origin of the funds that finance it motivates the concern of monetary authorities for the stability of these institutions (O'Brien and Farooqi 2019). The sub-prime crisis of 2008 highlighted the risks that affect the banking industry and the associated cost to the economy when they are not properly managed and mitigated.…”

“…The sub-prime crisis of 2008 highlighted the risks that affect the banking industry and the associated cost to the economy when they are not properly managed and mitigated. Precisely about this crisis, the Basel Committee on Banking Supervision (from now on referred to as the Basel Committee or simply the Committee) reviewed its capital adequacy framework intending to correct the shortcomings detected in terms of quality and quantity of capital and of the risk coverage, process that ended in December 2017 with the publication of the final version of the Basel III Capital Accord (Farooqi and O'Brien 2019). Meanwhile, the legal framework that governs the Libyan banking sector in terms of capital recorded its most significant changes in 1986 and 1997, which indeed Libyan banking is subject to the recommendations of the Basel Capital Accord I, which came into force in 1988 and was replaced by Basel II in 2004 (Xiong et al 2018).…”