Leverage and bank’s performance: do type and crises matter?

Abstract

ABSTRACT This study investigates the effect of leverage on banking system performance in the Gulf Cooperation Council (GCC) countries considering the business model differences in the banking industry (commercial and Islamic banks) and the role of the financial crises. Empirically there is a negative relationship between debt financing and the performance of banks, which supports the signalling theory and contradicts the agency cost theory. Bank’s business model is among the factors that affect banks’ performance; commercial banks are more profitable than Islamic banks. The 2007/2008 financial crises affect GCC banks’ performance negatively. After two years of its occurrence, two years were needed until the crises were transferred to the GCC banking system.