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Bank Risk-Taking and Legal Origin: What Do We Know about Dual Banking Economies?

Author

Listed:
  • Mohsin Ali

    (School of Accounting and Finance, Faculty of Business and Law, Taylor’s University, Subang Jaya 47500, Selangor, Malaysia)

  • Nafis Alam

    (School of Business, Monash University Malaysia, Bandar Sunway 47500, Selangor, Malaysia)

  • Mudeer Ahmed Khattak

    (Department of Business Administration, Iqra University—Islamabad Campus, Islamabad 44000, Pakistan)

  • Wajahat Azmi

    (Thiagarajar School of Management, Madurai District, Thiruparankundram 625005, Tamil Nadu, India)

Abstract

This paper investigates the relationship between legal origin and banks’ risk-taking behavior. We employ GMM to study a sample of both Islamic and conventional banks from 14 dual banking economies from 2005–2018. Our findings can be summarized as follows: (a) bank risk-taking and legal origin are negatively related in our sample countries, (b) Islamic banks are more stable in English law (common) countries, and (c) bank regulations have a differential effect on Islamic and the conventional banks. Our overall findings align with the dark side of the legal framework, indicating a robust legal framework to encourage bank risk-taking. The results have several implications for shareholders, regulators, and other key stakeholders.

Suggested Citation

  • 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.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:5:p:224-:d:819329
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    References listed on IDEAS

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