CAPITAL DETERMINANTS OF ISLAMIC BANKS IN QISMUT COUNTRIES
DOI:
https://doi.org/10.24191/s8hfwx85Keywords:
Capital buffer, Capital adequacy ratio, Capital risk, Islamic banks, QISMUTAbstract
Insufficient capital buffers put banks at risk, jeopardizing their stability and potentially leading to bankruptcy. A reduced capital adequacy ratio raises concerns among depositors about the bank's long-term viability, eroding depositors’ trust and confidence in the bank's sustainability. Therefore, the study intends to investigate the causal factors of capital decisions in Islamic banks within QISMUT countries using unbalanced panel data from 2007 to 2022. The study utilized a fixed-effect model with cluster regression to rectify the heteroscedasticity and serial correlation problems in the data sample. The findings uncover that credit risk and profitability are positively significant with the capital buffer. On the other vein, liquidity level, bank size, and business cycles are discovered to be inversely related with the capital buffer. Intriguingly, the capital buffer of QISMUT Islamic banks is found to be significantly lower in times of crises compared to non-crisis periods. This data proves that an Islamic bank’s capital buffer is negatively affected during a recession. Hence, QISMUT regulators must take severe measures to address the moral hazard issue that is prevalent among larger Islamic banks. The study suggests that Islamic banks reserve a high amount of capital buffer at all times while prudently managing their liquidity level. Islamic banks also need to boost more capital, particularly in good times when the cost is cheaper, to be consumed later when the economy is doing poorly.
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