Examining the relationship between bank stability and earnings quality in Islamic and conventional banks

Abstract

Purpose The purpose of this paper is to investigate the effect of earnings quality on banking stability in Gulf Cooperation Council countries. First, the author isolates the discretionary loan loss provision (DLLP) to investigate the impact of total LLP, DLLP, discretionary accruals and a small positive variation in net income on bank stability. Second, the author investigates differences that may exist between Islamic banks (IBs) and conventional banks (CBs) in terms of the impact of DLLP on bank stability. Design/methodology/approach This research is based on unbalanced panel data for 39 IBs and 64 CBs in the six Gulf Cooperation Council countries over the 2000–2014 period. Findings The findings indicate that the extent of stability is negatively associated with the level of DLLP. This study also found significant differences between the two banking sectors in the effect of DLLP on bank stability. Practical implications This study has various practical implications. First, it provides insights for governments and regulators about introducing instruments like borrower restrictions and dynamic provisions to reduce LLP, because it negatively affects banking stability. Second, bankers should carefully assess the effects of their LLP strategies to overcome any negative effects. Third, the findings are also relevant to shareholders, investors and bank customers. More specifically, the results will help to improving their understanding of how LLP is not a financial strength and it is subject to managers’ opportunism that can lead to a financial instability. Finally, this study’s results encourage researchers to investigate an unexplored question, namely, the procyclicality of LLP and its determinants and effects. Originality/value To the best of the author’s knowledge, this is the first study to investigate differences that may exist between Islamic and CBs in terms of the impact of DLLP on bank stability.

Cluster analysis of the economic activity of Slovak companies regarding potential indicators of earnings management

“…These models, or in general the issue of earnings management, is often analysed in various sectors of economic activity. Very often, for example, studies focus on earnings management in banks, for example [21] focused on African banks, [22] on US banks, [23] analysed Iranian banks and [24] Islamic banks. Other areas of application include, for example, insurance, which have been addressed by [25].…”

Earnings Quality and Bank Stability: Non-Empirical Study

“…In contrast to the findings of Riahi's (2020) research, Dal Maso et al (2018 did an investigation on the relationship between earnings quality and bank stability. They come to the conclusion that it is simpler to create larger loan loss reserves as a result of the post-crisis improvements in financial reporting techniques.…”

“…Turusbekova et al (2020) propose that banks and other forms of financial institutions can be compared to the economy's blood arteries. Riahi (2020) adds that the stability of the financial institutions also contributes to a country's overall monetary stability. Because of this, some researchers became interested in examining the problem of bank stability.…”

Financial stability in Indonesian Islamic banking using Z-Score: Before and during Covid-19

“…The increase in high FDR will also increase the operating burden that can burden banks (Festiani, 2016), so there need to be financing restrictions (Riahi, 2020). The high FDR does not increase financing risk if appropriately managed (Wahyudi et al, 2021).…”