GRM 2010 GRM 2011

Abstract Details

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Market Discipline and Governance Models across GCC Countries: Comparative Study between Islamic and Conventional Banks Depositors
Paper Proposal Text :
The role of market discipline is receiving increasing attention from researchers and policymakers alike in the light of the recent market circumstances. Market discipline constitutes a form of self-regulation exercised by purchasers of financial services which is meant to punish the behavior of sellers that impose a cost on the buyers for which they have not been compensated (Berger, 1991). In the case of depositors, this could mean their withdrawal of deposits, the shortening of formal and factual maturities or the demanding of higher return rates. Whereas quite a few empirical investigations into the existence of market discipline exercised by depositors for the US and other countries have been undertaken (e.g., Berger and Turk-Ariss, 2015; Martinez Peria and Schmukler, 2001), to our knowledge, there is no study for GCC countries that explicitly takes into account the specific features of the GCC financial system. Indeed, GCC countries have a dual banking system where Islamic and conventional banks are operating side by side. According to IMF (2015), Islamic banking assets represent more than 25% of total banking assets by august 2015.
While, Islamic banks savers have a profit-risk-sharing characters, conventional banks savers are renowned for preferring safe, long-term investments, thus providing patient capital. This study examines and compare whether GCC Islamic and conventional banks depositors are really that patient, abstaining from any type of market discipline, and how the financial market behaviors (crisis) might have changed this well-established habit.
Using a unique data set for 74 GCC Islamic and conventional banks during the period 2000-2014, this study takes up the issue of market discipline by GCC depositors (Investment account holders and conventional banks depositors) and analyzes and comparing empirically whether and in what manner differences in bank (Islamic and conventional) governance structures affected depositors' behaviors during the 15 years of observations. The following research questions are addressed: First, do depositors (Investment account holders and conventional banks depositors) respond to increased bank risk-taking by investing a smaller proportion of their savings in bank deposits? Second, how did the structure of Islamic and conventional banks deposits behave over the observation period? Third, do depositors (Investment account holders and conventional banks depositors) demand higher return rates from riskier banks? Fourth, can any differences be observed between large private banks and small banks (both Islamic and conventional)?
In order to answer these questions, an empirical analysis will be conducted applying panel regression techniques to analyze empirically the GCC dual banking system using a unique data set combining world banks statistics, balance sheet statistics, and the supervisory database of the GCC central banks. A new measure of market discipline is introduced which provides a deeper insight into depositors' behaviors.
Primary results does not confirm the supposed passiveness of GCC depositors, but rather reveals the existence of market discipline and, in this regard, signals a high degree of heterogeneity among GCC depositors (for conventional and Islamic banks). This heterogeneity acknowledges the impact of governance structure. Conventional depositors and investment account holders differ with respect to the risk indicator that triggers sanctions, the type of sanction chosen and in terms of the impact of the financial crisis. More analysis is needed before making any conclusion.
The article complements the existing empirical evidence on market discipline in banking general and Islamic banking in particular in several ways. First, the article provides one of the most comprehensive evidence on depositors’ market discipline in GCC countries. Second, it aims to contribute to the literature on market discipline by depositors and on the relationship between banks' risk-taking behavior and governance structures. Third, it compares the attitude of Islamic banks with those of conventional banks. Fourth, in the context of developing economies, like the GCC economies, it provides a novel assessment of the significance of variables such as market rumours, parent company fundamentals, and financial market fundamentals for depositors’ decisions. Fourth, in a comprehensive manner, it reflects on the role of market discipline in insulating the stability of the banking system (both conventional and Islamic). Despite the fact that the evidence is derived from GCC experience, we conjecture that the results here are relevant to other emerging economies with similar ownership and competitive banking structures.

Keys worlds: Market discipline, investment account holders, bank depositor behavior, bank risk taking, deposit rates, GCC countries