Risk-Taking Behaviour of Islamic Banks: A Panel Study

Abstract

The aim of this paper is to investigate the factors that impact the risk-taking behavior of Islamic banks before the 2008 financial crisis. The study covers a sample of 110 Islamic banks (represent almost all the Islamic banks in the world) across twenty-five countries which are members of the Organization of Islamic Cooperation (OIC; the organization has 57 members), during the period 1989-2008. The author uses a two-step system generalized method of moments dynamic model to analyze the data. Moreover, Fixed Effect (FE) and Random Effect (RE) models are used to check the robustness of the study results. The results show that profitability, liquidity, management efficiency, size and money supply growth reduce Islamic banks risk. On the other hand, capital adequacy, off-balance sheet activities, concentration, deposit insurance, GDP growth and inflation increase Islamic banks risk. The implications of this study can be beneficial to policymakers, regulators, and banks managers in countries with dual financial system or Islamized financial system as it will help them formulate better policies to ensure the stability of the financial system. To be noted that, according to the best of the author knowledge, this is the first paper that study the factors affecting the risk-taking behavior of Islamic banks using a large sample of Islamic banks with a prolonged period (20 years).