Dual Banking System Research Articles

Relationship between Conventional and Islamic Interbank Rates of a Dual Banking System in Malaysia, Middle East, and Western Countries

The purpose of this research is to investigate the relationship between conventional monetary policy rate (CIMMR) and Islamic monetary policy rate (IIMMR) in Malaysia and selected Middle East countries and Western countries. This study runs a panel Cointegration test, a panel VECM and Wald test to examine the relationship and causal effect between the CIMMR and IIMMR for the sample of six countries starting from 2009 until 2018 based on monthly and yearly basis dataset. This study finds that CIMMR and IIMMR, in monthly and yearly basis, are both cointegrated and have a long-run relationship amongst them. Our findings confirm that there is a long run causality effect between conventional and Islamic monetary policies based on monthly interbank rates. Our findings further confirm that there is a short run causality effect between conventional and Islamic monetary policies based on yearly interbank rates. We confident that the implication of Islamic interbank rates in the implementation of monetary policy within a dual system is very high as proven by taking into consideration a different regions as samples for this panel study. To the best of the authors’ knowledge, this would greatly contribute to the body of knowledge in the field of monetary policy.

Credit risk pricing and the rationality of lending decision-making within dual banking systems: A parametric approach

The reduction of non-performing loans, and making correct provisions for them, plays a primary role in the management and minimization of banking credit risk. However, these actions depend primarily upon the cost at which banks may dispose of these bad loans. Hence, this study aims to perceive the price of banks’ credit risk via estimating the shadow price of non-performing loans. We assess and compare the perceived price of the credit risk of Islamic and conventional banks operating in 9 countries from the Middle East and Asia, using a quadratic directional distance function. Following this, we evaluate the impact of different settings of directional vectors on shadow prices by conducting a risk-sensitivity analysis. Applying bootstrap regression, the factors affecting NPLs’ prices are further investigated. The paper concludes that the estimation of the shadow prices of bad loans can provide important elements in favor of credit risk management and, therefore, credit risk mitigation.

Bank Stability Index for Selected Countries with Dual Banking Systems

Bank Stability Index for Selected Countries with Dual Banking Systems

Influence of economic freedom and its subcomponents on risk-taking behavior

PurposeThe purpose of this paper is to investigate the influence of economic freedom and six relevant subcomponents of it on the risk-taking behavior of banks in the Malaysian dual banking system. It also aims to make a comparative analysis between Islamic and conventional banks operating in this dual banking sector. Moreover, the study is an effort to enrich the existing literature by presenting empirical evidence on the argument that the risk-taking behavior of the two types of banks is indistinguishable given that they operate in the same regulatory environment.Design/methodology/approachSecondary data of all banks operating in the Malaysian banking sector are collected from FitchConnect database, in addition to the economic freedom index from Foundation Heritage for the period 2011–2017. Generalized least squares technique is employed to estimate the influence of economic freedom and the six relevant subcomponents of it on the risk-taking behavior of banks.FindingsThe level of economic freedom influenced risk-taking behavior within the banking sector as a whole, conventional and Islamic banking sectors negatively during the study period (2011–2017). Risk-taking behavior of conventional and Islamic banks is similar. However, conventional banks turn to be less influenced by economic freedom level as compared to Islamic banks.Practical implicationsThe government and regulators may benefit from the results by rethinking and setting the best economic freedom index that better serves the stability of the banking system, and lessens banks’ risk-taking inclination.Originality/valueTo the present time, this paper is thought to be of a significant contribution. Given the argument that Islamic and conventional banks behave in the same way. This is one of the first attempts to address this issue in light of the influence of economic freedom and six subcomponents of it on the risk-taking behavior of banks operating in a dual banking system.

The Role of Capital on Islamic Bank Spin-Offs in Indonesia

"Research Aims: Some Islamic banks have experienced decreasing performance after spinning off from the parent company, and it is presumed that the amount of capital may have contributed to the decline. Hence, this paper aims to find a minimum amount of capital that Islamic banks must own after spin-offs in order to be able to compete in the market and to achieve excellent performance. Design/Methodology/Approach: We employ the OLS method for small banks (assets below Rp 5 trillion) with variable Capital as the dependent variable and Bank Performance (ROA, ROE, BOPO, and NPL) as the independent variable. We conduct several rounds of regression analysis by including different dummy variables to capture an increase in bank performance when certain capital limits are applied. Various results of the interaction between Capital and Bank Performance are mapped into the frontier line formed by the regression equation. We then compare the frontier results with the actual bank identifier to map the position of each bank relative to the frontier. We add cluster analysis to confirm the results further. Research Findings: Descriptive statistics of the small banks shows that conventional banks perform better in overall performance, efficiency and risk in comparison with the Islamic banks. Several dummy variables are set to represent the size of bank capital (Rp. 800 billion, Rp. 1 trillion, Rp. 1.2 trillion, and Rp. 1.5 trillion), and all dummy variables are significant; the corresponding coefficient reveals that the higher the capital, the better the average performance. Also, the relationship between performance and bank capital is a non-linear (quadratic) relationship that is convex, indicating that capital is not the only critical factor that contributes to the bank’s improvement. The cluster analysis partially confirms that there is a specific pattern of capital in each of the clusters. Theoretical Contribution/Originality: The result of this study is in line with some previous literature on the relationship between capital and bank performance. In banks with small capital, capital has a positive influence on bank performance but has the opposite effect after reaching a certain point. In the literature related to spin-offs in Islamic banking, there are only a few studies about the performance of small banks after the spin-off and even fewer (or none) that discuss the critical role of capital and its relationship with the bank’s performance after the spin-off. Our findings support previous studies conducted by Siswantoro (2014). Managerial Implications in the South East Asian Context: With the implementation of the dual banking system in several southeast Asian countries, many conventional banks have Islamic bank subsidiaries. Findings from this research could help banking regulators in the South East Asian countries to carefully re-evaluate their spin-off strategy for the unit bank, especially regarding the limit of capital requirement before the spin-off. The bigger the capital size, the better the performance of the business unit after the spin-off. Research Limitation & Implications: This research only uses variable capital as a determinant for the bank’s performance after spin-offs. However, as suggested by the resulting R-Squared from the regression formula (66%) and the convex trend line of the frontier analysis, other factors may contribute to the banking performance. Future research should include several other indicators for spin-off success, such as parent-subsidiary relationship (Tubke, 2004; Lindholm-Dahlstrand, 2000) and parent’s size (Cristo and Falk, 2006), credit and liquidity position before spin-offs."

Bank Risk and Financial Development: Evidence From Dual Banking Countries

ABSTRACTThis study examines the impact of financial development on bank risk-taking, measured as bank capitalization and bank income diversification. We observe the relationship using annual bank-level data from countries with dual-banking systems. The dataset spans from 2000 to 2014. Our results suggest that the impact of financial development on bank capitalization is heterogeneous across Islamic and conventional commercial banks. Moreover, the effect is different across listed and unlisted banks. However, on average, the response of income diversification to financial development is similar across most specifications. Additionally, bank risk is found to be countercyclical, suggesting that bank risk increases in good times. On average, these results (countercyclical evidence) hold across bank types (Islamic and conventional) and ownership structure (listed and unlisted). However, these results are contingent on the size (small vs. large) factor. The results are robust to alternative proxies of financial development.

Bank Stability Measures in Dual Banking System: A Critical Review

The 2007-2009 Global Financial Crisis showed that despite reported as ‘healthy’ financial institution prior to crisis had indeed suffered many problems including liquidity during the crisis. Thus, there is confusion on the healthy financial institutions, leading to loss of confidence on the overall stability of the banking system. Thus, there is an urgent need to review the current measures of financial as well as banking stability. This paper aims to look at the definition of ‘stability’ used in the academic researches and by different regulatory bodies, like International Monetary Fund, Basel Committee for Banking Supervision (BCBS) and central banks in selected countries with dual banking systems. It is then, critically review indicators used as measures of financial as well as banking stability. This review is hope to identify areas of strengths as well as weaknesses of the current measures of stability and serves as foundation for further research in future.

Ownership Structure, Bank Capital and Bank Lending/Financing Behaviour in a Dual Banking System

Credit supply in the market is crucial in order to ensure sustainable real production can survive in the market as well as to strengthen economic activity. Therefore, it is not surprising that when the financial crisis occurred in 2008 to 2009, policymakers continued to use a variety of mechanisms such that banks could continue to maintain their credit supply. Nevertheless, risk sharing based on the business model that was adopted by Islamic banks displayed different behaviour from the conventional banks. Based on prior studies, the stability of financing growth by Islamic banks as compared to lending growth of conventional banks showed the model used by Islamic banks was more capable of effectively withstanding the financial crisis. Therefore, research into the quality of lending and financing is important to understand the growth of bank lending and financing behaviour in the market. Hence, the main objective of this study is to review the effect of ownership structure, bank capital and bank lending including financing behaviour in Islamic versus conventional banks. In addition, this study proposes a conceptual framework to further comprehend the decisions made in undertaking ownership structure, bank capital and lending in the dual banking system.

Differential market valuations of board busyness across alternative banking models

This study comparatively assesses the influence of board busyness (i.e., multiple directorships of outside directors) on stock market valuations of both Islamic and conventional banks. For a sample of listed banks from 11 countries for the period 2010–2015, results show that board busyness is differentially priced by investors depending on the bank type.In conventional banks, board busyness is significantly and positively valued by the stock market. This result suggests that investors perceive some reputational benefits arising from a busy board (e.g., extended industry knowledge, established external networks or facilitation of external market sources). In contrast, we find no supporting evidence on the market valuations of board busyness in Islamic banks. This result might be attributed to, both, the complex governance structure and the uniqueness of the business model which require additional effective monitoring, relative to that employed in conventional banking. Our results also show that investors provide significantly low market valuations for busy Shari’ah advisory board which acts as an additional layer of governance in Islamic banks. Findings in this study offer important policy implications to international banking studies and regulations governing countries with dual-banking systems.

Faktor-faktor yang Memengaruhi Tingkat Non Performing Financing dan Non Performing Loan pada Dual Banking System di Indonesia

The value of non-performing financing Islamic banks in Indonesia based on OJK data on 2017 at 4.76%, which is greater than the percentage of non-performing loans in conventional banks at 2.59%, then that’s make a question why the percentage of Islamic banks is greater and what factors influence it. Data retrieval research is sourced from quarterly financial reports in the first quarter of 2012 to the third quarter of 2017 as many as 10 Islamic banks and 10 conventional commercial banks. This study aims to analyze the factors that affect the level of non-performing finance (NPF) and non-performing loans (NPL) in dual banking system Indonesia. Variable independent in this research are the growth of gross domestic product (GDP), inflation, BI rate, return on assets (ROA), financing to deposit ratio (FDR)/loan to deposit ratio (LDR), capital adequacy ratio (CAR), operating expenses on operating income (BOPO), and total assets while the dependent variable is NPF and NPL. The analytical method used to test the hypothesis is by panel regression analysis. The results of this study indicate that the sharia commercial banks have a significant influence on NPF including GDP, inflation, CAR, ROA, FDR, and BOPO. In conventional commercial banks significant factors include GDP, inflation, BI rate, CAR, LDR, BOPO, and total assets.

Pengaruh Keuangan Syariah terhadap Pertumbuhan Ekonomi dan Indeks Pembangunan Manusia di Indonesia

One of variable to calculate the Human Development Index (HDI) is a decent standard of living derived from the Gross Domestic Product (GDP) figure. Therefore, the increase in HDI could be influenced by GDP. Furthermore, as a Muslim-majority country and adopting a dual banking system, Indonesia's GDP is certainly also influenced by the Islāmic financial sector, such as zakat and Islāmic bank financing. In this case, zakat plays role as a wealth distribution instrument. Then Islamic bank financing could be a funding capital for the community and the country. So, this study analyzes the direct and indirect relationship between the variables of zakat, Islamic bank financing and GDP to the HDI. The method used is path analysis which aims to look at the hypothesis of causal relationships. The results obtained are the direct relationship of Islamic bank financing and GDP significantly positive effect on HDI. Zakat and Islamic bank financing variables have a positive effect on GDP. The greatest coefficient value between direct relationships is the coefficient of Islamic bank financing on GDP, which is equal to 81.7%. But the direct relationship of zakat to the HDI cannot be known. While the indirect relationship shows that there is an influence between the variables of zakat on the HDI through GDP and there is an influence between the variables of Islamic bank financing on the HDI through GDP.

EVALUATING STABILITY IN DUAL BANKING SYSTEM: COMPARISON BETWEEN CONVENTIONAL AND ISLAMIC BANKS IN MALAYSIA

Purpose of Study: This paper aims to explore whether Islamic banks are more stable when compared with conventional banks in a dual banking system. Methodology: This research employs Pooled OLS methodology for 42 banks, including 27 conventional banks and 15 Islamic banks, for the period of 2005-2016. Results: The study suggests that Islamic banks are less stable compared to conventional banks in overall banking sector. Furthermore, it is found that big Islamic banks are less stable than big conventional banks and small Islamic banks are less stable than small conventional banks. The results disapprove of the widespread belief that Islamic banks are more stable and more resilient to adverse shocks in the financial crisis. Moreover, while investigating the shift in overall level of banking stability with respect to financial crises, regardless of bank type and bank size, it is observed that the overall banking stability is enhanced after the financial crises. This is intriguing and a sigh of relief for policy makers and regulators in the country. Implications/Applications: This research is of contribution to policy makers and central banks in the countries with highly dual banking environment and for the central banks striving to become International Islamic financial hub.

Does the size of Islamic banking matter for industry growth: international evidence

ABSTRACTIslamic banking, which has witnessed unprecedented growth in the last quarter of the century is hypothesized to be able to contribute to the development of the financial sector and thus to economic growth through tools inherent to this faith-based model of banking. We test the hypothesis that a higher relative presence of Islamic banking is beneficial to the growth of external finance dependent industries. Using data for 28 industries in 14 countries with dual banking systems, we find that the absolute and relative size of Islamic banking do have a positive impact on industry growth. The results are robust to controlling for the quality of finance as well as for the degree of competition in the banking industry.

MONETARY POLICY PASS-THROUGH, EXCESS LIQUIDITY AND PRICE SPILLOVER: A COMPARATIVE STUDY OF CONVENTIONAL AND ISLAMIC BANKS OF PAKISTAN

This study investigates the comparative pass-through of policy rate to the retailprices, spillover of prices between Islamic and conventional banking systems, and theimpact of excess liquidity on these pass-throughs using data from interbank marketof Pakistan. The results suggest that the monetary policy shock affect retail prices ofIslamic banks similar to conventional banks, confirming the results of earlier studies.Moreover, there is a strong spillover between the prices of two systems; Islamicbanks are following (leading) the conventional banks in pricing the lending (deposit)products. Islamic bank has acquired advantage in the deposit pricing by taping thereligious depositors, which also may have promoted financial inclusion therebycontributing to the economic growth and improved income distribution in the society.Our findings suggest that the presence of excess liquidity have no effect on passthroughof policy rate in the Islamic system, which is contrary to the prevalent notion.However, excess liquidity significantly affects the spillovers of prices between thesystems. These results support the hypothesis that the Islamic banks are investing ininterest-based government securities indirectly via conventional banks. Our findingsmay help in enhancing the regulatory efficiency of the central banks and the conduct ofthe monetary policy in the countries where dual banking system exists.

Culture and the capital–performance nexus in dual banking systems

While recent surveys have taken a special interest in culture to explain the failure of existing regulation, empirical evidence on the role of culture in influencing the bank capital-performance link is still largely unexplored. In this paper, we ask the following: Should regulators and policy makers make room for culture as an effective tool for a successful bank regulatory environment? We identify three proxies for cultural values derived from Hofstede (1980, 2001) and the World Values Survey and investigate to what extent individualism, masculinity, and trust can enhance or impede the capital-performance link for conventional and Islamic banks. Analyzing a panel of 729 banks operating in 33 countries from 1999 to 2013, our findings provide empirical evidence that cultural values enhance the capital-performance link for the two bank types. Our results have important policy implications: our paper represents a first initiative and provides evidence that culture has merits and can be used as an additional tool to implement regulatory guidelines in a successful way.

Board busyness, performance and financial stability: does bank type matter?

ABSTRACTThis study examines the impact of board busyness (i.e. multiple directorships of outside board members) on the performance and financial stability of banks in a dual banking system (Islamic and conventional). We consider banks from 14 countries for the period 2010–2015. The results provide strong evidence that conventional banks with busy boards exhibit high bank performance (i.e. high profitability and low cost to income) and greater financial stability (i.e. low insolvency risk, credit risk, liquidity risk, asset risk, and operational risk). These findings are in line with the reputation hypothesis, which asserts that the expertise and connections of busy outside directors lead to better decision making, more efficient resource utilisation and more effective monitoring. In contrast, Islamic banks’ performance and stability are adversely affected by the presence of busy board members, with Islamic banks show low profitability, high cost to income and high risk-taking. This result might be attributed to the complex governance structure of Islamic banks and the uniqueness of their financial products, which require additional effective monitoring.

BANK FINANCING AND FIRM GROWTH: THE ROLE OF ISLAMIC BANK FINANCING

The study examined the influence of Islamic and/or conventional bank financing on the growth of firms. The data were based on 113 firms in a Middle East country – Jordan – that implemented a dual-banking system from 2007 to 2016. The finding revealed that the implementation of either type of bank financing, be it Islamic and/or conventional, affect the growth of the firms. The study observed that Islamic bank financing had a more significant effect on the growth of the firms. Following the results of this study, stakeholders, managers, and investors are expected to change their views on Islamic bank financing, which is currently viewed as a part of religious practice. It may lead to the utilization of Islamic bank financing by firms. It should be noted that this study is one of the first empirical studies on the impact of Islamic bank financing on the growth of firms.

Analytical Study of Dual banking and Earlier Efforts towards Islamization of Bank of Khyber in the light of Shariah

The proposal of interest-free banking is very old because Islam restricted the interest base transaction at very beginning after the revelation of prohibition of Interest, noble Quran called it as Riba. This prohibition is of sever nature relatively, Allah says; O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger.
 The suggestion for the establishment of such financial institutions that run according to shariah has been put in queue for about centuries. To get rid from the dominancy of conventional banking system, forced the religious scholar to take initiative in this regard and started interest free banking. It was not easy to switch entirely from conventional banking system to Islamic one as for different technical issues, leads the existent banks to start dual banking system.
 Bank of Khyber is the first Bank of Khyber Pakhtunkhwa operating as dual banking, i.e. Conventional as well as Interest free banking. This study focuses on analysis of dual banking system of bank of KHYBER in order to know the extent of conformity with shariah standards along with highlighting the earlier efforts of it towards Islamization.

Islamic banking and real performances in a dual banking system

PurposeThere is a rich debate on the nature of Islamic banking (IB)–growth nexus and the direction of causality governing this nexus. This study aims to focus on this issue in the case of Saudi Arabia, the largest country-holder of Islamic Banks (IBs)’ assets worldwide. It assesses empirically the nature of dynamic interactions between IBs’ financing and the real performances in the non-oil private sector (investment and GDP) in the context of a dual banking system where IBs operate alongside their conventional counterparts.Design/methodology/approachThis study employs the Bounds test in the context of reparametrized autoregression distribution lags (ARDL) models to analyse both long-run and short-run dynamics governing Islamic and conventional banks’ (CBs) financings on one hand and real investment and GDP in the private sector on the other hand over the 2007q1-2016q4 period. It also uses the Toda and Yamamoto (1995) augmented Granger-causality test to assess the direction of causality governing these dynamics.FindingsThe more important results are: there is a stable and significant long-run relationship between IBs’ financing and real performances in the private sector. This nexus is governed by the “feed-back hypothesis”, implying the validity of both the “supply-leading” and the “demand-following” hypotheses. In a dual banking system context, IBs exert two effects on the financing of their conventional counterparts: a negative “crowding-out” effect and a positive and “stimulating” effect which transmits through the “competition” channel. Finally, in the long-run, steady-state, real GDP is dissociated from CBs’ financing.Originality/valueThis paper highlights an issue that has not received the needed attention in the case of Saudi Arabia. It has also found novel results with important policy implications.

Efficiency, Asset Quality and Stability of the Banking Sector in Malaysia

Malaysia practices a dual banking system, where conventional banks coexist with Islamic banks. While conventional banks are well established, Islamic banks are growing rapidly. Since Islamic banks consist of two types, namely stand-alone or wholesome Islamic banks and Islamic subsidiaries of conventional banks, it would be revealing to examine if Islamic subsidiaries of conventional banks differ from standalone Islamic banks in terms of efficiency, stability and assets quality. A few studies in the literature that examine the issue have focused on comparisons between Islamic banks and conventional banks, with no consideration given to the differentiation between the two categories of Islamic banks. In this paper, we attempt to examine the differences among the players in the banking sector in Malaysia. This paper extends the traditional analysis of conventional versus Islamic banks to comparisons between stand-alone Islamic banks and Islamic subsidiaries of conventional banks. Using dynamic panel data “generalized methods of moments” (GMM), the study reports that there are differences among different types of banks, viz. conventional banks, Islamic subsidiaries of conventional parents, and stand-alone Islamic banks. It shows that Islamic subsidiaries of conventional banks perform better than stand-alone Islamic banks as well as their own conventional parents. Furthermore, the results show that Islamic subsidiaries are more stable in term of their financing income compared to the rest of the banks, while the stand-alone banks have lower asset quality in comparison with both Islamic subsidiaries and their parents.