Religiosity and Bank Asset Securitization

Abstract

The global financial turmoil of 2007-2008 underlines the importance of understanding asset securitization, a process that allows banks to shed credit risk, fund their credit growth, and arbitrage capital requirements. Examining this ethically questionable activity has become crucial given its perceived long-term social impact. This paper examines the factors that motivate banks' decisions to enter into asset securitization. In particular, we examine the influence of both organizational and geographic religiosity as important ethical parameters of economic choices on banks' decisions to securitize their assets. We employ propensity scores using a unique database on asset securitization of banks in 22 countries during the period of 2003-2012. We find that both types of religiosity indicators are significantly associated with banks' decisions to securitize. Banks located in countries with high religious importance scores show a lower likelihood to securitize. We also find that religiously adhered banks are likely to embark on a constrained model of securitization, which involves a high level of monitoring. In addition, our analysis suggests that religiously adhered banks are less likely to engage in asset securitization to reduce credit risk by shifting it to new investors. This conclusion is supported by their lower credit risk in the years before securitization. Alternatively, our results suggest that these banks embark on asset securitization to improve their financial and regulatory performance. Our study emphasizes the importance of considering religiosity as an important institutional factor and a monitoring mechanism in future global banking studies. Findings in this study are of importance to researchers, to local and international regulators, and to different stakeholders in the international banking sector.

The efficiency patterns of Islamic banks during the global financial crisis: The case of Bangladesh

“…Yet these results cannot be generalised into a simple Islamic versus Conventional bank performance comparison for the reasons explored in this paper. As Beck et al (2013) report, the heterogeneous interpretation and implementation of Sharia conformable products mean that 21 Abdelsalam et al (2017) show that strongly religious IBs are less likely to engage in securitization. 22 The stock market was largely unaffected during 2007 but registered a slump with a fall of 22% during May-November 2008, see Rahaman et al (2013).…”