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Legal rules, information transparency and Islamic bank capital decisions

Author

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  • Mohammad Bitar
  • Mohammed Benlemlih
  • Elias Erragragui
  • Jonathan Peillex

Abstract

To what extent does the formal institutional environment influence Islamic bank capital decisions? We answer this question by assessing the effect of the legal rule index on a sample of 100 Islamic banks in 28 countries from 1999 to 2013. Our econometric analyses show that legal rule index positively and significantly influences capital ratios. The results can be explained by the idea that effective legal rules incentivize Islamic banks to hold higher capital ratios to signal better monitoring to depositors and regulators. In addition, we find that this positive association can be enhanced through strong information transparency channels, democratic and stable political institutions. These results provide insight into how a formal institutional environment can shape Islamic bank capital ratios. It further suggests that the formal institutional environment serves as a constraint on policymakers, as any given capital guideline may function very differently depending on the complexity of the formal institutional environment.

Suggested Citation

  • Mohammad Bitar & Mohammed Benlemlih & Elias Erragragui & Jonathan Peillex, 2021. "Legal rules, information transparency and Islamic bank capital decisions," Applied Economics, Taylor & Francis Journals, vol. 53(53), pages 6184-6203, November.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:53:p:6184-6203
    DOI: 10.1080/00036846.2021.1937497
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    Cited by:

    1. Mohsin Ali & Nafis Alam & Mudeer Ahmed Khattak & Wajahat Azmi, 2022. "Bank Risk-Taking and Legal Origin: What Do We Know about Dual Banking Economies?," JRFM, MDPI, vol. 15(5), pages 1-13, May.
    2. Erragragui, Elias & Peillex, Jonathan & Benlemlih, Mohammed & Bitar, Mohammad, 2023. "Stock market reactions to corporate misconduct: The moderating role of legal origin," Economic Modelling, Elsevier, vol. 121(C).

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