Determinants of Capital Adequacy Ratio (CAR) in MENA Region: Islamic vs. Conventional Banks

Osama El-Ansary, Ahmed El-Masry, Zainab Yousery

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Abstract

Purpose: The purpose of this research is to conduct a comparative analysis of CAR determinants between Islamic and conventional banks.

Design/methodology/approach: The analysis is conducted using GMM on annual data for 38 Islamic banks (IBs) and 75 conventional banks (CBs) in 10 MENA countries during 2009-2013. CAR is used as a dependent variable and is measured by the Basel framework. The independent variables are: profitability; liquidity risk; credit risk; bank size; deposits to assets; operational efficiency; portfolio risk; and two macro-economic variables (GDP growth rate and average world governance indicators for each country).

Findings: The results show that both IBs and CBs have a significant association between CAR and (bank size, operational efficiency, and GDP growth rate) and CAR is affected retroactively on the long-run. In IBs the results show a significant association between CAR and deposits to assets ratio. However, CBs results show an association between CAR and (profitability, credit risk, and portfolio risk).

Practical implications: The empirical evidence accentuates the difference between both banking systems and the importance to enforce the application of the Islamic Financial Services Board (IFSB) proposal on IBs based in different jurisdictions. This will enhance the IBs stability and efficiency; and achieve standardization of CAR calculation between IBs.

Originality/value: Filling the gap in the Islamic finance literature by trying to examine whether factors influencing CAR are similar between both banking systems or to confirm on the view that they are completely different and should not adhere to the same regulatory bodies.

Original languageEnglish
Pages (from-to)287-313
Number of pages27
JournalInternational Journal of Accounting and Financial Reporting
Volume9
Issue number2
DOIs
Publication statusPublished - 24 May 2019
Externally publishedYes

Bibliographical note

This is an open-access article distributed under the terms and conditions of the Creative Commons Attribution license (http://creativecommons.org/licenses/by/4.0/)

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