GRM 2010 GRM 2011

Abstract Details

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Does Varying Banking Regulations Impact Islamic Banking Performances- Comparative Evidence from GCC and SEA
Paper Proposal Text :
The recent global financial crisis (GFC) of 2007-2008 was mainly caused by the regulatory inefficiencies in the banking and financial system. Deteriorating lending standards led to an accelerated credit extension and leverage strategies by financial institutions. Recent financial crises have highlighted the importance of banking regulations to hedge against the high risk accredited to imbalances in banks’ balance sheets. Nonetheless, banking regulations may have adverse effects. On the one hand, they serve as prudential measures that alleviate the effects of crises on the stability of the banking system while on the other hand; they may increase the cost of intermediation and reduce banks’ profitability. In the aftermath of financial crisis, it was widely assumed that Islamic Banking system was less impacted by the financial crisis. The dilemma is, if Islamic banking should be self-insulated from the flaws arising from conventional banking through implementation of Sharia law, why do Islamic banks still need regulatory authorities and frameworks? Moreover, Islamic banking regulations can be more intricate to apply given the varying Sharia law in different jurisdiction due to its application and implementation. Implementation of non-suitable regulations such as Islamic banks adopting conventional banks regulations could also impair banks’ performance. This paper analyses whether adopting Islamic banking regulations and frameworks has any significant impact on Islamic banks’ performance in South/Southeast Asia (SEA) and Gulf Cooperation Council (GCC) using two-step Generalized Methods of Moments (GMM) technique. The paper makes use of exhaustive Islamic banking sample; 45 Islamic banks from GCC and 43 from SEA for the sample period of 2004-2015. Findings suggest that regulatory variables are positively significant with Islamic banks’ performance in the SEA region but not in the GCC. The findings of the paper also contribute to the literature by comparing how similar determinants affecting Islamic banks’ performance differ in behavior in the GCC and SEA. The findings stipulate the importance of competition and banking sector development for the GCC Islamic banking system. Results suggest that the GCC has a high market power in the banking industry which results in lower competition. Findings also suggest that the Islamic regulatory variables were not significant for the GCC Islamic banks, which could imply that the Sharia governance is already efficiently embedded within the Islamic banking system in the GCC. The analysis of high-performing banks in the GCC region stipulates that the adverse impacts from having an under developed stock market are less severe for high-performing Islamic banks. This suggests that high-performing Islamic banks are much better at overcoming problems such as lack of portfolio diversification and Sharia compliant issues.

A major contribution of this study to existing literature would be the heavy emphasis on the effects of varying Islamic banking regulations on Islamic banks’ performance. Various new variables such as Sharia Regulation; Islamic Regulatory Framework; Composition of Sharia Board Members and National Sharia Supervisory Authority were introduced to control for many aspects relating to Islamic banking regulatory system. The study also found that, when it is relevant for a country to use Sharia law as its fundamental law, there is no need for separate legal acts on Islamic banking or a National Sharia supervisory board. However, these specific Islamic banking regulations are found to be of importance if the country is not based on Sharia law. In countries whereby Sharia law is not used as the foundation of the ruling law, a separate legal act acknowledging Islamic banks could be very helpful in aiding Islamic banks to perform better. This could be due to the difference in Islamic banks operations which allow Islamic banks to perform better at their own pace without facing fierce competition from its conventional counterparts.