The impact of ownership structure on bank credit risk: Evidence from Bangladesh

Sarker, Niluthpaul; Nahar, Shamsun

doi:10.17015/ejbe.2017.019.02

Cited by 5 publications

(5 citation statements)

References 42 publications

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“…For example, Srairi (2013) reports an inverse association between ownership concentration and bank risk-taking in the MENA countries. Similar results are reported by Sarker and Nahar (2017) for commercial banks in Bangladesh. The results for the ownership variable in Table 3 support this finding; the estimated coefficient of ownership concentration is strongly significant and negative.…”

Section: Empirical Results and Discussionsupporting

confidence: 88%

Regulation, banking competition and risk-taking behavior in the MENA region: policy implications for Islamic banks

Mateev

Moudud‐Ul‐Huq

Sahyouni

2021

JIABR

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Purpose This paper aims to investigate the impact of regulation and market competition on the risk-taking Behaviour of financial institutions in the Middle East and North Africa (MENA) region. Design/methodology/approach The empirical framework is based on panel fixed effects/random effects specification. For robustness purpose, this study also uses the generalized method of moments estimation technique. This study tests the hypothesis that regulatory capital requirements have a significant effect on financial stability of Islamic and conventional banks (CBs) in the MENA region. This study also investigates the moderating effect of market power and concentration on the relationship between capital regulation and bank risk. Findings The estimation results support the view that capital adequacy ratio (CAR) has no significant impact on credit risk of Islamic banks (IBs), whereas market competition does play a significant role in shaping the risk behavior of these institutions. This study report opposite results for CBs – an increase in the minimum capital requirements is followed by an increase in a bank’s risk level, which has a negative impact on their financial stability. Furthermore, the results support the notion of a non-linear relationship between banking concentration and bank risk. The findings inform the regulatory authorities concerned with improving the financial stability of banking sector in the MENA region to set their policy differently depending on the level of concentration in the banking market. Research limitations/implications This study contributes to the literature on the effectiveness of regulatory reforms (in this case, capital requirements) and market competition for bank performance and risk-taking. In regard to IBs, capital requirements are less effective in requiring IBs to adjust their risk level according to the Basel III methodology. This study finds that IBs’ risk behavior is strongly associated with market competition, and therefore, the interest rates. Moreover, banks operating in markets with high banking concentration (but not necessarily, low competition), will decrease their credit risk level in response to an increase in the minimum capital requirements. As a result, these banks will be more stable compared to their conventional peers. Thus, regulators and policymakers in the MENA region should restrict the risk-taking behavior of IBs through stringent capital requirements and more intense banking supervision. Practical implications The practical implications of these findings are that the regulatory authorities concerned with improving banking sector stability in the MENA region should proceed differently, depending on the level of banking market concentration. The findings inform regulators and policymakers to set capital requirements at levels that would restrict banks from taking more risk to increase their returns. They are also important for bank managers who should avoid risky strategies in response to increased regulatory pressure (e.g. increase in the minimum required capital level of 8%), as they may lead to an increase in the level of non-performing loans, and therefore, a greater probability of bank default. A future extension of this study will focus on testing the effect of bank risk-taking and market competition on the capitalization levels of banks in the MENA countries. More specifically, this study will investigates if banks raise their capitalization levels during the COVID-19 pandemic. Originality/value The analysis of previous research indicates that there is no unambiguous answer to the question of whether IBs perform differently than CBs under different competitive conditions. To fill this gap, this study examines the influence of capital regulation and market competition (both individually and interactively) on bank risk-taking behavior using a large sample of banking institutions in 18 MENA countries over 14 years (2005–2018). For the first time in this line of research, this study shows that the level of market power is positively associated with the level of a bank’ insolvency risk. In others words, IBs operating in highly competitive markets are more inclined to take a higher risk than their conventional peers. Regarding the IBs credit risk behavior, this study finds that market power has a limited impact on the relationship between CAR and risk level. This means that IBs are still applying in their operations the theoretical models based on the prohibition of interest.

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Section: Empirical Results and Discussionsupporting

confidence: 88%

Regulation, banking competition and risk-taking behavior in the MENA region: policy implications for Islamic banks

Mateev

Moudud‐Ul‐Huq

Sahyouni

2021

JIABR

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“…Previous studies (Srairi 2013 ; Lassoued et al 2016 ; Sarker and Nahar 2017 ) find that ownership structure is an important determinant of bank risk in the MENA region. Bases on these findings, we hypothesize that ownership concentration and foreign ownership should positively impact bank risk-taking, whereas government ownership is expected to increase bank risk-taking.…”

Section: Empirical Results and Discussionmentioning

confidence: 92%

Bank regulation, ownership and risk taking behavior in the MENA region: policy implications for banks in emerging economies

2022

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This paper investigates the impact of bank regulation and ownership on the risk-taking behavior of financial institutions in the MENA region. We test the hypothesis that the effect of regulation on bank risk depends on the type of ownership structure. The public and private views of bank regulation are used to explain the relationship between regulatory measures and bank risk. We find that the official supervisory index exerts a positively associated with bank credit risk which is in line with ‘private interest view’ of bank regulation; however, private monitoring does have an opposite effect. The analysis of the regulatory measures impact on bank insolvency risk provides further support of the private interest view regarding the impact of market discipline. In addition to regulations, ownership structure (e.g., ownership concentration and foreign ownership) also plays a significant role in shaping the risk-taking behavior of banks in the MENA region. Our analysis reveals that the effect of banking regulations on risk-taking behavior strongly depends on the type of ownership structure prevailing in each banking system (Islamic and conventional). Our findings inform regulatory authorities concerned with improving the financial stability of banking sectors in the MENA countries and other emerging economies where Islamic and conventional banks co-exist, to carefully tailor banking reform initiatives depending on the type of the banking system as they may pursue different risk management strategies. Supplementary Information The online version contains supplementary material available at 10.1007/s11846-022-00529-5.

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“…Firstly, previous literature suggests an endogenous relationship and mixed evidence regarding bank capital and risk-taking. Previous literature examines the influence of bank ownership structure on risk-taking and/or profitability (Akhtar et al, 2019;Al-Tamimi & Jellali, 2013;Barry et al, 2011;Ehsan & Javid, 2018;Hammami & Boubaker, 2015;Ozili & Uadiale, 2017;Sarker & Nahar, 2017;Saunders et al, 1990;Srairi, 2013). Further studies examine the links among banking sector regulation, risk-taking and ownership structures (Laeven & Levine, 2008;Rahman et al, 2012;Zheng et al, 2017).…”

Section: Introductionmentioning

confidence: 99%

The nexus between Basel capital requirements, risk-taking and profitability: what about emerging economies?

Mujtaba

Akhtar

Ashfaq

et al. 2021

Economic Research-Ekonomska Istraživanja

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The impact of ownership structure on bank credit risk: Evidence from Bangladesh

Abstract: Abstract

Cited by 5 publications

References 42 publications

Regulation, banking competition and risk-taking behavior in the MENA region: policy implications for Islamic banks

Regulation, banking competition and risk-taking behavior in the MENA region: policy implications for Islamic banks

Bank regulation, ownership and risk taking behavior in the MENA region: policy implications for banks in emerging economies

The nexus between Basel capital requirements, risk-taking and profitability: what about emerging economies?

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