Capital Decision of Islamic Banks in Developing Countries

Abstract

The study investigates capital decisions of Islamic banks in developing countries. The study uses 96 Islamic banks in developing countries from period of 2007 to 2021. By applying the random effect model with cluster regression, the findings reveal that all variables are found to be negatively correlated with the capital buffer. The results recommend regulators in developing countries to ensure Islamic banks maintain consistent capital ratios at all times to address the moral hazard issue that is apparent in larger banks. In response to economic cycles, Islamic banks are also encouraged to manage their capital buffers in a counter-cyclical manner.