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Examining the relationship between default risk and efficiency in Islamic and conventional banks

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Examining the relationship between default risk and efficiency in Islamic and conventional banks. / Saeed, Momna; Izzeldin, Marwan.

In: Journal of Economic Behavior and Organization, Vol. 132, No. Supplement, 12.2016, p. 127-154.

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Saeed, Momna ; Izzeldin, Marwan. / Examining the relationship between default risk and efficiency in Islamic and conventional banks. In: Journal of Economic Behavior and Organization. 2016 ; Vol. 132, No. Supplement. pp. 127-154.

Bibtex

@article{260efbd0275048558a726cefe15fe855,
title = "Examining the relationship between default risk and efficiency in Islamic and conventional banks",
abstract = "We examine the relationship between efficiency and default risk in Islamic banks (IBs) and conventional banks (CBs) in Gulf Cooperation Countries (GCC) and three non-GCC countries over the period 2002–2010. To the best of our knowledge this is the first study to consider the efficiency–default risk paradigm in a comparative setup which includes IBs. Efficiency and default risk are measured using the Stochastic Frontier Approach and distance to default (Merton's model) respectively. The existence of causality/reverse causality between the two is addressed via a panel Vector Auto Regression (VAR) framework. Our analysis shows that the relationship between profit efficiency and default risk banks across the sample, for CBs and for the GCC is such that a decrease in default risk is associated with lower efficiency levels. With the single exception of IBs, the causality from profit efficiency to default risk is inversely related for all categories. For CBs, the trade-off between efficiency and risk is evident. The absence of a trade-off for IBs suggests that efficiency and default risk are plausible early warning indicators of IB instability. These findings could be of relevance to regulators in countries where both banking system co-exist.",
keywords = "Islamic banking, Banking efficiency, Stochastic Frontier Analysis, Default risk, Merton's model, Panel VAR",
author = "Momna Saeed and Marwan Izzeldin",
year = "2016",
month = dec,
doi = "10.1016/j.jebo.2014.02.014",
language = "English",
volume = "132",
pages = "127--154",
journal = "Journal of Economic Behavior and Organization",
issn = "0167-2681",
publisher = "Elsevier",
number = "Supplement",

}

RIS

TY - JOUR

T1 - Examining the relationship between default risk and efficiency in Islamic and conventional banks

AU - Saeed, Momna

AU - Izzeldin, Marwan

PY - 2016/12

Y1 - 2016/12

N2 - We examine the relationship between efficiency and default risk in Islamic banks (IBs) and conventional banks (CBs) in Gulf Cooperation Countries (GCC) and three non-GCC countries over the period 2002–2010. To the best of our knowledge this is the first study to consider the efficiency–default risk paradigm in a comparative setup which includes IBs. Efficiency and default risk are measured using the Stochastic Frontier Approach and distance to default (Merton's model) respectively. The existence of causality/reverse causality between the two is addressed via a panel Vector Auto Regression (VAR) framework. Our analysis shows that the relationship between profit efficiency and default risk banks across the sample, for CBs and for the GCC is such that a decrease in default risk is associated with lower efficiency levels. With the single exception of IBs, the causality from profit efficiency to default risk is inversely related for all categories. For CBs, the trade-off between efficiency and risk is evident. The absence of a trade-off for IBs suggests that efficiency and default risk are plausible early warning indicators of IB instability. These findings could be of relevance to regulators in countries where both banking system co-exist.

AB - We examine the relationship between efficiency and default risk in Islamic banks (IBs) and conventional banks (CBs) in Gulf Cooperation Countries (GCC) and three non-GCC countries over the period 2002–2010. To the best of our knowledge this is the first study to consider the efficiency–default risk paradigm in a comparative setup which includes IBs. Efficiency and default risk are measured using the Stochastic Frontier Approach and distance to default (Merton's model) respectively. The existence of causality/reverse causality between the two is addressed via a panel Vector Auto Regression (VAR) framework. Our analysis shows that the relationship between profit efficiency and default risk banks across the sample, for CBs and for the GCC is such that a decrease in default risk is associated with lower efficiency levels. With the single exception of IBs, the causality from profit efficiency to default risk is inversely related for all categories. For CBs, the trade-off between efficiency and risk is evident. The absence of a trade-off for IBs suggests that efficiency and default risk are plausible early warning indicators of IB instability. These findings could be of relevance to regulators in countries where both banking system co-exist.

KW - Islamic banking

KW - Banking efficiency

KW - Stochastic Frontier Analysis

KW - Default risk

KW - Merton's model

KW - Panel VAR

U2 - 10.1016/j.jebo.2014.02.014

DO - 10.1016/j.jebo.2014.02.014

M3 - Journal article

VL - 132

SP - 127

EP - 154

JO - Journal of Economic Behavior and Organization

JF - Journal of Economic Behavior and Organization

SN - 0167-2681

IS - Supplement

ER -