IDEAS home Printed from https://ideas.repec.org/a/bpj/ajlecn/v14y2023i3p275-297n4.html
   My bibliography  Save this article

Islamic and Conventional Banks an Analogy: Relationship Between Capital, Risk and Efficiency

Author

Listed:
  • Azeem Muhammad

    (University of Central Punjab, Gujranwala Campus, Lahore, Pakistan)

Abstract

Does inefficiency interrelate with more risk? Is there any real distinction between traditional (interest based) and Islamic banks (non-interest based) as far as efficiency and risk taking concern? The purpose of this research is to answer these inquiries with regards to Pakistan. A few studies tried to analyze the performance of traditional and Islamic banking, but, no study specifically examines the trio between bank’s risk, capital and efficiency in Pakistan. By doing so the date has been extracted from the audited annual reports of concerned banks. Additionally, sophisticated statistical techniques applied to drew valid estimations such as; Data Envelopment Analysis (DEA), Seemingly Unrelated Regression (SUR) respectively. Moreover, the outcomes indicate that Islamic banks are highly effective in cost control as compared to traditional banks. Furthermore, the estimations of SUR establish the interrelation among efficiency and capital for Islamic banks only. Precisely, enhanced risk reduces capital and efficiency of Islamic banks, whereas the dynamic of traditional banks are different.

Suggested Citation

  • Azeem Muhammad, 2023. "Islamic and Conventional Banks an Analogy: Relationship Between Capital, Risk and Efficiency," Asian Journal of Law and Economics, De Gruyter, vol. 14(3), pages 275-297, December.
    • Handle: RePEc:bpj:ajlecn:v:14:y:2023:i:3:p:275-297:n:4
    DOI: 10.1515/ajle-2022-0132
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/ajle-2022-0132
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/ajle-2022-0132?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fiordelisi, Franco & Marques-Ibanez, David & Molyneux, Phil, 2011. "Efficiency and risk in European banking," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1315-1326, May.
    2. Berg, Nathan & El-Komi, Mohamed & Kim, Jeong-Yoo, 2016. "Market segmentation and non-uniform Shariah standards in Islamic finance," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 39-49.
    3. Claudia Girardone & Philip Molyneux & Edward Gardener, 2004. "Analysing the determinants of bank efficiency: the case of Italian banks," Applied Economics, Taylor & Francis Journals, vol. 36(3), pages 215-227.
    4. Zuzana Fungácová & Laura Solanko & Laurent Weill, 2010. "Market power in the russian banking industry," International Economics, CEPII research center, issue 124, pages 127-146.
    5. Md. Dulal Miah & Kashfia Sharmeen, 2015. "Relationship between capital, risk and efficiency," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 8(2), pages 203-221, June.
    6. Pettway, Richard H, 1976. "Market Tests of Capital Adequacy of Large Commercial Banks," Journal of Finance, American Finance Association, vol. 31(3), pages 865-875, June.
    7. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 2002. "Government Ownership of Banks," Journal of Finance, American Finance Association, vol. 57(1), pages 265-301, February.
    8. Mamatzakis, Emmanuel & Staikouras, Christos & Koutsomanoli-Filippaki, Anastasia, 2008. "Bank efficiency in the new European Union member states: Is there convergence?," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 1156-1172, December.
    9. Benston, George J & Smith, Clifford W, Jr, 1976. "A Transactions Cost Approach to the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 31(2), pages 215-231, May.
    10. Hameeda Abu Hussain & Jasim Al‐Ajmi, 2012. "Risk management practices of conventional and Islamic banks in Bahrain," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 13(3), pages 215-239, May.
    11. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
    12. Kwan, Simon H., 2006. "The X-efficiency of commercial banks in Hong Kong," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1127-1147, April.
    13. repec:cii:cepiei:2010-4te is not listed on IDEAS
    14. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
    15. Berger, Allen N. & Hanweck, Gerald A. & Humphrey, David B., 1987. "Competitive viability in banking : Scale, scope, and product mix economies," Journal of Monetary Economics, Elsevier, vol. 20(3), pages 501-520, December.
    16. Altunbas, Yener & van Leuvensteijn, Michiel & Marqués-Ibáñez, David, 2014. "Competition and bank risk: the effect of securitization and bank capital," Working Paper Series 1678, European Central Bank.
    17. Laurent Weill, 2003. "Banking efficiency in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(3), pages 569-592, September.
    18. Denizer, Cevdet A. & Dinc, Mustafa & Tarimcilar, Murat, 2000. "Measuring banking efficiency in the pre- and post-liberalization environment : evidence from the Turkish banking system," Policy Research Working Paper Series 2476, The World Bank.
    19. Berger, Allen N. & DeYoung, Robert, 1997. "Problem loans and cost efficiency in commercial banks," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 849-870, June.
    20. Adnan Kasman & Canan Yildirim, 2006. "Cost and profit efficiencies in transition banking: the case of new EU members," Applied Economics, Taylor & Francis Journals, vol. 38(9), pages 1079-1090.
    21. Allen N. Berger & Timothy H. Hannan, 1998. "The Efficiency Cost Of Market Power In The Banking Industry: A Test Of The "Quiet Life" And Related Hypotheses," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 454-465, August.
    22. Kraft, Evan & Tirtiroglu, Dogan, 1998. "Bank Efficiency in Croatia: A Stochastic-Frontier Analysis," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 282-300, June.
    23. Das, Abhiman & Ghosh, Saibal, 2004. "Risk, capital and operating efficiency: Evidence from Indian public sector banks," MPRA Paper 17399, University Library of Munich, Germany.
    24. Saunders, Anthony & Strock, Elizabeth & Travlos, Nickolaos G, 1990. "Ownership Structure, Deregulation, and Bank Risk Taking," Journal of Finance, American Finance Association, vol. 45(2), pages 643-654, June.
    25. repec:zbw:bofitp:2010_003 is not listed on IDEAS
    26. Yener Altunbas & Santiago Carbo & Edward P.M. Gardener & Philip Molyneux, 2007. "Examining the Relationships between Capital, Risk and Efficiency in European Banking," European Financial Management, European Financial Management Association, vol. 13(1), pages 49-70, January.
    27. Colwell, R J & Davis, E P, 1992. " Output and Productivity in Banking," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(0), pages 111-129, Supplemen.
    28. Carbo, S & Gardener, E P M & Williams, J, 2002. "Efficiency in Banking: Empirical Evidence from the Savings Banks Sector," Manchester School, University of Manchester, vol. 70(2), pages 204-228, March.
    29. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2011. "Market reforms, legal changes and bank risk-taking: evidence from transition economies," Bank of Finland Research Discussion Papers 7/2011, Bank of Finland.
    30. Rime, Bertrand, 2001. "Capital requirements and bank behaviour: Empirical evidence for Switzerland," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 789-805, April.
    31. Christophe Godlewski, 2004. "Capital Regulation and Credit Risk Taking : Empirical Evidence from Banks in Emerging Market Economies," Finance 0409030, University Library of Munich, Germany.
    32. repec:zbw:bofrdp:2011_007 is not listed on IDEAS
    33. Zins, Alexandra & Weill, Laurent, 2017. "Islamic banking and risk: The impact of Basel II," Economic Modelling, Elsevier, vol. 64(C), pages 626-637.
    34. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, in: Output Measurement in the Service Sectors, pages 245-300, National Bureau of Economic Research, Inc.
    35. Talla Al-Deehani & Rifaat Ahmed Abdel Karim & Victor Murinde, 1999. "The Capital Structure Of Islamic Banks Under The Contractual Obligation Of Profit Sharing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 243-283.
    36. Md. Dulal Miah & Kashfia Sharmeen, 2015. "Relationship between capital, risk and efficiency," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 8(2), pages 203-221, June.
    37. Otchere, Isaac & Chan, Janus, 2003. "Intra-industry effects of bank privatization: A clinical analysis of the privatization of the Commonwealth Bank of Australia," Journal of Banking & Finance, Elsevier, vol. 27(5), pages 949-975, May.
    38. Hasan, Iftekhar & Marton, Katherin, 2003. "Development and efficiency of the banking sector in a transitional economy: Hungarian experience," Journal of Banking & Finance, Elsevier, vol. 27(12), pages 2249-2271, December.
    39. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-444, June.
    40. Tara Deelchand & Carol Padgett, 2009. "The Relationship between Risk, Capital and Efficiency: Evidence from Japanese Cooperative Banks," ICMA Centre Discussion Papers in Finance icma-dp2009-12, Henley Business School, University of Reading.
    41. Fries, Steven & Taci, Anita, 2005. "Cost efficiency of banks in transition: Evidence from 289 banks in 15 post-communist countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 55-81, January.
    42. S. Carbo & E. P. M. Gardener & J. Williams, 2002. "Efficiency in Banking: Empirical Evidence from the Savings Banks Sector," Manchester School, University of Manchester, vol. 70(2), pages 204-228, March.
    43. R J Colwell & E P Davis, 1992. "Output, Productivity and Externalities - the Case of Banking," Bank of England working papers 3, Bank of England.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francesco Aiello & Graziella Bonanno, 2018. "On The Sources Of Heterogeneity In Banking Efficiency Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 194-225, February.
    2. Francesco Aiello & Graziella Bonanno, 2016. "Efficiency in banking: a meta-regression analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(1), pages 112-149, January.
    3. Mamatzakis, Emmanuel & Zhang, Xiaoxiang & Wang, Chaoke, 2016. "Invisible hand discipline from informed trading: Does market discipline from trading affect bank capital structure?," MPRA Paper 76215, University Library of Munich, Germany.
    4. Otero, Luis & Razia, Alaa & Cunill, Onofre Martorell & Mulet-Forteza, Carles, 2020. "What determines efficiency in MENA banks?," Journal of Business Research, Elsevier, vol. 112(C), pages 331-341.
    5. repec:onb:oenbwp:y::i:96:b:1 is not listed on IDEAS
    6. Staub, Roberta B. & da Silva e Souza, Geraldo & Tabak, Benjamin M., 2010. "Evolution of bank efficiency in Brazil: A DEA approach," European Journal of Operational Research, Elsevier, vol. 202(1), pages 204-213, April.
    7. Salma Louati & Younes Boujelbene, 2021. "Basel Regulations and Banks’ Risk-efficiency Nexus: Evidence from Dynamic Simultaneous-equation Models," Journal of African Business, Taylor & Francis Journals, vol. 22(4), pages 578-602, October.
    8. Ghosh, Saibal, 2018. "Bad luck, Bad policy or Bad banking? Understanding the financial management behavior of MENA banks," Journal of Multinational Financial Management, Elsevier, vol. 47, pages 110-128.
    9. José Luis Gallizo & Jordi Moreno & Manuel Salvador, 2015. "European banking integration: is foreign ownership affecting banking efficiency?," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(2), pages 340-368, April.
    10. Gabriel Asaftei & Subal Kumbhakar, 2008. "Regulation and efficiency in transition: the case of Romanian banks," Journal of Regulatory Economics, Springer, vol. 33(3), pages 253-282, June.
    11. Mamatzakis, Emmanuel & Staikouras, Christos & Koutsomanoli-Filippaki, Anastasia, 2008. "Bank efficiency in the new European Union member states: Is there convergence?," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 1156-1172, December.
    12. Hakan Güneş & Dilem Yıldırım, 2016. "Estimating Cost Efficiency of Turkish Commercial Banks under Unobserved Heterogeneity with Stochastic Frontier Models," ERC Working Papers 1603, ERC - Economic Research Center, Middle East Technical University, revised Mar 2016.
    13. Andrieş, Alin Marius & Căpraru, Bogdan, 2014. "The nexus between competition and efficiency: The European banking industries experience," International Business Review, Elsevier, vol. 23(3), pages 566-579.
    14. Alin Marius Andries & Bogdan Capraru, 2013. "Impact of Financial Liberalization on Banking Sectors Performance from Central and Eastern European Countries," PLOS ONE, Public Library of Science, vol. 8(3), pages 1-9, March.
    15. E. Mamatzakis, 2015. "Risk and efficiency in the Central and Eastern European banking industry under quantile analysis," Quantitative Finance, Taylor & Francis Journals, vol. 15(3), pages 553-567, March.
    16. Do Van Anh,, 2022. "Does better capitalization enhance bank efficiency and limit risk taking? Evidence from ASEAN commercial banks," Global Finance Journal, Elsevier, vol. 53(C).
    17. Adnan Bashir & Arshad Hassan, 2017. "Interrelationship Among Basel Capital Regulation, Risk, and Efficiency in Pakistani Commercial Banks," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 9(2), pages 165-186, June.
    18. Tan, Yong & Anchor, John, 2017. "The impacts of risk-taking behaviour and competition on technical efficiency: Evidence from the Chinese banking industry," Research in International Business and Finance, Elsevier, vol. 41(C), pages 90-104.
    19. Changjun Zheng & Anupam Das Gupta & Syed Moudud-Ul-Huq, 2017. "Do market competition and development indicators matter for banks’ risk, capital, and efficiency relationship?," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-27, June.
    20. Nurboja, Bashkim & Košak, Marko, 2017. "Banking efficiency in South East Europe: Evidence for financial crises and the gap between new EU members and candidate countries," Economic Systems, Elsevier, vol. 41(1), pages 122-138.
    21. Saeed, Momna & Izzeldin, Marwan & Hassan, M. Kabir & Pappas, Vasileios, 2020. "The inter-temporal relationship between risk, capital and efficiency: The case of Islamic and conventional banks," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:ajlecn:v:14:y:2023:i:3:p:275-297:n:4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.