Abstract
A strong capital adequacy ratio is crucial to a financial institution's success and helps it to survive any potential financial crisis. From Q1 2017 to Q4 2019, the influence of the Capital Adequacy Ratio (CAR) on the performance of Commercial Islamic Banks in MENA nations (Qatar, Oman, Bahrain, Kuwait, United Arab Emirates, Saudi Arabia, and Jordan) is examined. The performance measures utilized in this study are Return on Assets (ROA) and Return on Equity (ROE). The study's sample frame comprises all Islamic commercial banks in the designated MENA nations, with a sample size of 18 Islamic commercial banks. Panel data, fixed and random models, are applied in this study since there are multiple entities and time series. The findings of the study showed that the selected Islamic banks are committed to Capital Adequacy Ratio (CAR) which is defined under Basel III. This is considered the largest percentage regulated by the Basel Committee. The study also found that there is a statistically negative significant influence of CAR on both performance indicators ROE and ROA in the commercial Islamic banks in the selected MENA countries. The results of the study can be useful to a policymaker or decision-makers in the Islamic Banks industry. First, the research could be a reference to financial regulators such as central banks which may use the findings to provide regulation on optimal capital levels for local banks in terms of regulations, deregulations, and financial disruption. Next, the practice implications in the Islamic banking sector will provide them with insight as to how a bank’s capital influences its earnings. Hence, management can work towards attaining an optimal structure that maximizes their performance as well as identifying “best” and “worst” practices associated with capitalization levels.
Highlights
Commercial banks are one of the biggest and oldest cash-mediating financial institutions, with the primary goal of receiving deferred and current deposits from individuals and companies and reusing them to provide loans to individuals and non-bank economic units
Based on the aforementioned regarding the importance of capital adequacy, the objective of this study is to identify the extent to which Islamic banks in the selected MENA countries comply with the capital adequacy standard under Basel III agreement
Overall, comparing the capital adequacy ratio Capital Adequacy Ratio (CAR) of the data collected with CAR of Basel III, it is found that the selected Islamic banks in the selected MENA countries 129 has a strong capital adequacy ratio
Summary
Commercial banks are one of the biggest and oldest cash-mediating financial institutions, with the primary goal of receiving deferred and current deposits from individuals and companies and reusing them to provide loans to individuals and non-bank economic units. The International Journal of Business Ethics and Governance (IJBEG), Vol., No 2, 2021 above their expenditures, as well as providing banking services. They take on the role of funding economic units for individuals and businesses whose expenses exceed their revenue by lending processes. They participate in acquisition processes, assist in the creation of businesses, and arbitrate in the marketing of financial stocks, as well as the purchasing and distribution of tradeable international coins and other bank coins (AlAli, 2019). The Islamic countries have been influenced for a long time by the growth of these commercial Islamic Financial Institutions (IFIs)
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