Empirical testing of the loss provisions of banks in the GCC region

Zoubi, Taisier A.; Al‐Khazali, Osamah

doi:10.1108/03074350710753771

Cited by 54 publications

(78 citation statements)

References 18 publications

(20 reference statements)

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“…On average, in Islamic banks, LLP and beginning non-performing loans represent, respectively, 1.38 and 4.3 percent of beginning loans. Our findings are consistent with those reported by Zoubi and Al-Khazali (2007), Taktak et al (2010b) and Quttainah (2011) who found that Islamic banks make a low estimation of loss provisions and non-performing loan. The mean ratio of change in total loan equals 60.81 percent, like Taktak et al (2010b) and Quttainah (2011), results in standard deviation indicating a large dispersion in the level of loans provided by Islamic banks.…”

Section: Descriptive Statisticssupporting

confidence: 96%

“…There is no difference in the use of discretion by managers when reporting LLP between Islamic banks and their non-Islamic counterparts. This finding is in accordance with the one reported by Zoubi and Al-Khazali (2007), who found that Islamic and conventional banks follow the same way of provisioning.…”

Section: Islamic Banks Versus Conventional Banks (Panel B)supporting

confidence: 95%

“…The analysis of the results related to our control variables shows that contrary to our predictions the coefficient of size is not significant. Results in Panels A and B do not support the findings of Zoubi and Al-Khazali (2007) and Taktak et al (2010b). Indeed, we found that the large-sized banks are not found to report higher DLLP.…”

Section: Panel Regression Analysiscontrasting

confidence: 74%

“…Following Zoubi and Al-Khazali (2007), Taktak et al (2010b) and Quttainah (2011) who are interested in Islamic banking, we expect that the larger is the bank size, the higher is the DLLP. We state the following hypothesis in the null form:…”

Section: Bank Sizementioning

confidence: 97%

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The use of discretionary loan loss provisions by Islamic banks and conventional banks in the Middle East region

Othman¹,

Mersni²

2014

Studies in Economics and Finance

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Purpose -The purpose of this paper is to study earnings management practices of Islamic banks and conventional banks in the Middle East region. First, the authors examine factors that may influence Islamic banks managers' use of discretion in reporting loan loss provisions (LLP). Second, the authors investigate differences that may exist between Islamic banks and non-Islamic banks in terms of discretionary loan loss provisions (DLLP) used to manipulate accounting earnings. Design/methodology/approach -This empirical study uses an unbalanced panel data of 21 Islamic banks, 18 conventional banks with Islamic windows and 33 conventional banks, from seven Middle East countries during a period that ranges from 2000 to 2008. The authors use a two-stage approach in order to examine factors that may influence the use of discretion by Islamic banks' managers. Findings -The empirical results reveal that Islamic banks use DLLP for both earnings and capital management. External financing is also found to be a determinant of DLLP. Additional findings show no significant differences among Islamic banks, conventional banks with Islamic windows and conventional banks in using DLLP. These three groups of banks behave similarly in terms of discretion based on DLLP. Practical implications -The findings are potentially useful for regulators, auditors and investors. This study provides regulators with insights to strengthen their financial regulations in order to improve accounting quality. In addition, it helps auditors when considering the provisioning policies adopted by banks in order to detect specific manipulations of accounting earnings. The results may also help investors to focus on the impact of managerial discretion on accounting earnings for evaluation purposes. Originality/value -This study contributes to the literature on Islamic banking. On the one hand, it extends prior research by examining the discretionary component of LLP, instead of being restricted to total LLP. On the other hand, it compares the use of discretion among three groups of banks: full Islamic banks, conventional banks with Islamic windows and full conventional banks. SEF 31,1 106 1. Introduction A wide literature has addressed the issue of earnings management in the banking industry. It is shown that banks around the world are found to manage their earnings and banks' managers are motivated to minimize the earnings volatility over time. Current literature provides evidence that loan loss provisions (LLP) are used by banks as an instrument for long-term earnings management (Collins et al., 1995;Ismail and Be Lay, 2002;Anandarajan et al., 2005Anandarajan et al., , 2007Taktak et al., 2010a). Most existing studies have concentrated on conventional banks. However, little attention has been given to earnings management in Islamic banks in the Middle East region.Recent studies such as Zoubi and Al-Khazali (2007) and Taktak et al. (2010b) addressed the issue of the use of LLP in Islamic banks. Zoubi and Al-Khazali (2007) argue that Islamic banks use LLP to ...

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Section: Descriptive Statisticssupporting

confidence: 96%

Section: Islamic Banks Versus Conventional Banks (Panel B)supporting

confidence: 95%

Section: Panel Regression Analysiscontrasting

confidence: 74%

Section: Bank Sizementioning

confidence: 97%

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The use of discretionary loan loss provisions by Islamic banks and conventional banks in the Middle East region

Othman¹,

Mersni²

2014

Studies in Economics and Finance

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“…The main objective of banks, whether Islamic banks or conventional banks, is to attract deposits and to reinvest those deposits to make profits (Zoubi and Al‐Khazali, ). Therefore, Hamdi and Zarai () find that Islamic banks also have incentives to manage earnings to achieve certain goals.…”

Section: Background and Hypotheses Developmentmentioning

confidence: 99%

Do Islamic Banks Employ Less Earnings Management?

Quttainah

Song

2013

Financ Manag Account

144

106

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In this article, we examine whether Islamic banks are less likely to manage their earnings than non-Islamic banks and how Islamic banks' unique corporate governance system, especially Shari'ah Supervisory Boards, impacts earnings management behaviors within Islamic banks. Using a sample of Islamic banks and their matched non-Islamic banks in 15 countries, we find that, first, Islamic banks are less likely to conduct earnings management as measured by both earnings loss avoidance and abnormal loan loss provisions. Second, there are no significantly different earnings management behaviors between Islamic banks with and without Shari'ah Supervisory Boards. Third, several Shari'ah Supervisory Board characteristics, such as size and the presence of members from Auditing Organization for Islamic Financial Institutions, are important determinants of the earnings management of Islamic banks who have Shari'ah Supervisory Boards.

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Bibliography

2015

Risk Management for Islamic Banks

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Empirical testing of the loss provisions of banks in the GCC region

Cited by 54 publications

References 18 publications

The use of discretionary loan loss provisions by Islamic banks and conventional banks in the Middle East region

The use of discretionary loan loss provisions by Islamic banks and conventional banks in the Middle East region

Do Islamic Banks Employ Less Earnings Management?

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