- Title
- Risk and efficiency of Islamic and conventional banks
- Creator
- Safiullah, Md
- Relation
- University of Newcastle Research Higher Degree Thesis
- Resource Type
- thesis
- Date
- 2018
- Description
- Research Doctorate - Doctor of Philosophy (PhD)
- Description
- Islamic banking has grown in importance in the world financial system over the last decade and hence its risk and efficiency compared to conventional banking have become a subject of considerable interest to practitioners, academics and policymakers. The extant literature on risk in Islamic banking examines the difference in credit risk and insolvency risk between Islamic and conventional banks (e.g., Abedifar, Molyneux & Tarazi, 2013; Mollah et al., 2017) but ignores the liquidity risk and operational risk, and the effects of Shariah supervisory board composition on such risk attributes. There is also a strand of studies which compared the efficiency of Islamic banks with their conventional counterparts but this body of literature is still in its infancy. Previous studies estimate efficiency using a common efficient frontier (e.g., Abdul-Majid, Saal, & Battisti, 2010; Alqahtani, Mayes & Brown, 2017) in spite of the fact that two bank groups operate under different technological, regulatory and market conditions. The common efficient frontier does not make a distinction between group-specific efficient frontier of a bank group and the meta-efficient frontier of the entire industry and hence overestimates efficiency scores. The stochastic meta-frontier framework overcomes the problem of using a common frontier but no prior study uses it for Islamic and conventional banks. The examination of the role of Shariah supervisory board governance and regular board governance on the efficiency of Islamic banks was also beyond the scope of prior studies. This thesis aims to address these research gaps, by conducting three empirical studies with a large sample of Islamic and conventional banks from 28 countries. The first study examines the risk in Islamic banks in comparison with conventional banks, and the impact of Shariah supervisory board (SSB) composition on Islamic banks’ risk-taking. Unlike our predecessors, this thesis examines a comprehensive array of risk measures such as liquidity risk, credit risk, operational risk and insolvency risk for a matched-pair sample of 94 Islamic and 94 conventional banks during 2003–2014. This study finds that Islamic banks are more exposed to liquidity risk but less exposed to credit risk and insolvency risk when compared with their conventional counterparts. Two bank groups are indistinguishable in terms of operational risk measures. The SSB composition, such as SSB size and SSB members’ academic qualifications, are found to be negatively related to Islamic banks’ operational and insolvency risks but SSB members’ reputation is found to be positively related to those risks. The impact of SSB attributes are less pronounced for liquidity and credit risks. The joint effect of regular board governance and SSB governance shows that the presence of a dual-board system in Islamic banks is conducive to reducing operational and insolvency risks. The second study investigates the difference in technical efficiency between Islamic and conventional banks and the role of Shariah governance to explain technical inefficiency in Islamic banks. While prior studies examine a gross measure of technical inefficiency presuming that these two bank groups operate under a common technical efficient frontier, this study examines group-specific technical inefficiency, technology gap and meta-inefficiency for both bank groups, under a stochastic meta-frontier framework as proposed by Huang, Huang and Liu (2014). The common efficient frontier approach disregards the within-group efficiency difference and the technology gap representing the difference between a bank group’s efficient frontier and the meta-frontier of the entire banking industry. We find that a typical Islamic bank is 15.8 percentage points more technically inefficient compared to its conventional counterpart. This is due to Islamic banks not readily adopting and implementing the best available production technology. Furthermore, a stronger Shariah supervisory board has been found to reduce technical inefficiency in Islamic banks. In the third study, the risk-adjusted cost- and profit efficiency of Islamic and conventional banks have been investigated considering corporate governance factors as potential determinants of inefficiency. The cost- and profit functions have been used under a stochastic meta-frontier framework to estimate group-specific efficiency, cost gap ratio, profit gap ratio and meta-efficiency for both bank groups. Incorporating bank risk measures in the efficiency estimation, this study finds that, compared to conventional banks, Islamic banks are 4 percentage points more cost efficient, but 17 percentage points less profit efficient on a risk-adjusted basis. Islamic banks’ cost frontier is closer to the risk-adjusted cost meta-frontier but their profit frontier is far away from the risk-adjusted profit meta-frontier when compared with that of conventional banks. Stronger SSB governance reduces Islamic banks profit inefficiency. Overall, this thesis finds evidence of divergence between Islamic and conventional banks in terms of risk and efficiency. The findings of this thesis have several policy implications. For bank managers, this thesis may help to identify sources of risk and inefficiency, and device strategies to mitigate them. The findings of this thesis may also help Shariah standard-setting bodies (e.g., IFSB, AAOIFI) to develop guidelines for managing Islamic banks’ risk and increasing their access to a wider range of banking products and technologies for higher efficiency.
- Subject
- Islamic banking; Shariah supervisory board; ownership concentration; risk; stochastic meta-frontier; directional distance function; efficiency
- Identifier
- http://hdl.handle.net/1959.13/1388275
- Identifier
- uon:32737
- Rights
- Copyright 2018 Md Safiullah
- Language
- eng
- Full Text
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