The Nonlinear Relationship between Capital Structure and Performance of Islamic banks (in Persian)

This paper examines the nonlinear relationship between capital structure and financial performance of Islamic banks in selected member countries of the Organization of Islamic Cooperation over the period 2010–2020. Using a balanced panel of 125 banks comprising 1,375 annual observations, the study first estimates fixed-effects and dynamic panel linear models to assess the direct impact of the equity-to-assets ratio on return on assets and return on equity. It then applies a dynamic threshold panel regression model to capture potential nonlinearities. The results identify two capital ratio thresholds at 12 percent and 18 percent. Capital adequacy exerts a positive and statistically significant effect on performance up to the first threshold, followed by a modest decline at intermediate levels and a pronounced slowdown beyond the upper threshold. Structural stability tests, random resampling with 1,000 iterations, and alternative performance measures based on net interest margin and the Z-score confirm the robustness of these findings. Regional analysis indicates that the impact of capital on performance is stronger in the Gulf region than in other regions, reflecting differences in regulatory frameworks and market depth, which in turn influence optimal capital thresholds. The findings suggest that, when determining target capital ratios, Islamic banks must balance the benefits of tax shields and reduced agency costs at moderate capital levels against higher bankruptcy costs and increased operational complexity at elevated levels. From both theoretical and practical perspectives, the results inform the design of flexible, region-specific regulatory policies and provide empirical support for the efficiency risk hypothesis and the charter value hypothesis in the context of Islamic banking.