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Empirical evidence on the risk management tools practised in Islamic and conventional banks

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  • Omar Masood
  • Ghulam Shabbir Khan Niazi
  • Noryati Ahmad
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    Abstract

    Purpose – The purpose of this paper is to analyse the factors responsible for the rise and growth of smaller Islamic banks in the last decade. Design/methodology/approach – Z-score analysis is used to test the stability of both smaller and larger Islamic banks. The pooled ordinary least square (OLS) regression technique is also employed to examine the factors. Findings – The results of this paper show higher z-scores for smaller Islamic banks indicating that the latter have tended to be more stable than larger Islamic banks over the last decade. Z-scores tend to increase with bank size for large Islamic banks, but decrease with size for the small Islamic banks. The OLS regression results confirm that larger banks have greater income diversity than do the smaller banks. Originality/value – Islamic banking represents a radical departure from conventional banking, and from the viewpoint of corporate governance; it embodies a number of interesting features since equity participation, risk and profit-and-loss sharing arrangements form the basis of Islamic financing. Using econometric techniques, this paper provides valuable insights as to the stability of Islamic banks and the factors responsible for the growth of smaller such institutions that has been witnessed in the last decade.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=1755-4179&volume=3&issue=2&articleid=1937347&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Qualitative Research in Financial Markets.

    Volume (Year): 3 (2011)
    Issue (Month): 2 (June)
    Pages: 105-116

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    Handle: RePEc:eme:qrfmpp:v:3:y:2011:i:2:p:105-116

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Economic growth; Islamic banking; Regression analysis; Stability; Z-score;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Sathye, Milind, 2001. "X-efficiency in Australian banking: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 25(3), pages 613-630, March.
    2. Martin Cihák & Simon Wolfe & Klaus Schaeck, 2006. "Are More Competitive Banking Systems More Stable?," IMF Working Papers 06/143, International Monetary Fund.
    3. Martin Čihák & Heiko Hesse, 2010. "Islamic Banks and Financial Stability: An Empirical Analysis," Journal of Financial Services Research, Springer, vol. 38(2), pages 95-113, December.
    4. Luca Errico & Mitra Farahbaksh, 1998. "Islamic Banking," IMF Working Papers 98/30, International Monetary Fund.
    5. Abbas Mirakhor & Mohsin S. Khan, 1991. "Islamic Banking," IMF Working Papers 91/88, International Monetary Fund.
    6. Martin Cihák & Heiko Hesse, 2007. "Cooperative Banks and Financial Stability," IMF Working Papers 07/2, International Monetary Fund.
    7. Andreas Jobst, 2007. "The Economics of Islamic Finance and Securitization," IMF Working Papers 07/117, International Monetary Fund.
    8. Ihsan Isik, 2002. "Cost and Profit Efficiency of the Turkish Banking Industry: An Empirical Investigation," The Financial Review, Eastern Finance Association, vol. 37(2), pages 257-279, 05.
    9. Juan Sole, 2007. "Introducing Islamic Banks Into Coventional Banking Systems," IMF Working Papers 07/175, International Monetary Fund.
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