Islamic Banking : Issues in Prudential Regulation and Supervision

Errico, Luca; Farahbaksh, Mitra

doi:10.4197/islec.13-1.7

Cited by 14 publications

(15 citation statements)

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“…In addition to literatures based on pecking order and trade off theory, there exist other literatures on Islamic finance. Dhumale and Sapcanin (1999), Errico and Farahbaksh (1998), Iqbal and Mirakhor (1987) and Khan(1989) discussed the possibilities and perspectives of Islamic finance as a new development financing scheme and appropriate financial supervision called for 1 . However, the studies did not focus on corporate financing aspect.…”

Section: Existing Literatures and Testing Hypothesesmentioning

confidence: 99%

Islamic Finance and the Theory of Capital Structure

Nagano

2009

SSRN Journal

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This paper empirically investigates firms using Islamic finance in Malaysia and Middle East countries. The comparative analysis of Islamic finance and non-Islamic finance users resulted in three major implications. First, Islamic bond issuers preferentially choose the Islamic bond issuance prior to bank borrowing and other external financing tools. Second, Islamic bond issuance is not related to the issuer's internal funds, while Islamic bank borrowing is significantly influenced by the magnitude of a firm's internal funds. These results suggest that Islamic bond issuers do not always choose to issue bonds based on information cost, but Islamic bank borrowers always do. Third, the Islamic bond issuance contributes to an increase in the issuer's stock returns and total factor productivity. This empirical result suggests that Islamic bond issuance is preferred because of this unique benefit which standard external financing does not have.JEL Classification: G20, G21, G32

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Section: Existing Literatures and Testing Hypothesesmentioning

confidence: 99%

Islamic Finance and the Theory of Capital Structure

Nagano

2009

SSRN Journal

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“…More importantly for our study purposes, given the equity-like nature of savings and investment deposits, it has been strongly claimed that Islamic banks are more subject to market discipline (e.g., Errico and Farahbaksh 1998, El-Hawary et al 2004, Beck et al 2013. In other words, as 'quasi-shareholders', Islamic bank depositors would have greater incentives to exercise control over management to prevent excessive risk taking behavior.…”

Section: Introductionmentioning

confidence: 99%

Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework

et al. 2016

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Although it has been intensively claimed that Islamic banks are more subject to market discipline, the empirical literature is surprisingly mute on this topic. To fill this gap and to verify the conjecture that Islamic bank depositors are indeed able to monitor and discipline their banks, we use Turkey as a test setting. The theory of market discipline predicts that when excessive risk taking occurs, depositors will ask higher returns on their deposits or withdraw their funds. We look at the effect of the deposit insurance reform in which the dual deposit insurance was revised and all banks were put under the same deposit insurance company in December 2005. This gives us a natural experiment in which the effect of the reform can be compared for the treatment group (i.e., Islamic banks) and control group (i.e., conventional banks). We find that the deposit insurance reform has increased market discipline in the Turkish Islamic banking sector. This reform may have upset the sensitivities of the religiously inspired depositors, and perhaps more importantly it might have terminated the existing mutual supervision and support among Islamic banks.JEL codes: G23, G28, O52

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“…So according to his findings Islamic banks should be regulated with the same capital requirement as conventional banking. But other studies conducted by Errico and Farahbaksh (1998), Chapra and Khan (2000), Noibi, (2004) they argue that, regulatory capital requirements for conventional banks are based on their balance sheet and its debt based operations, which is completely different from profit sharing operations and risk profile of Islamic banks .…”

Section: Regulatory Capital Requirementmentioning

confidence: 99%

“…According to Errico and Farahbaksh (1998) Chapra and Khan (2000), they discussed the regulatory and supervisory challenges to calculate capital requirement and risk associated with IB. Similarly Noibi (2004) also discussed the applicability of Basle Committee regulatory frame to Islamic banking operations, and it was established that it is not compatible with Islamic banking.…”

Section: Regulatory Capital Requirementmentioning

confidence: 99%