Three essays on institutions and banking

Abstract

The performance of banks and their level of growth have a significant impact on the entire
economy. However, only a few countries have a developed banking system and economic
development. Political economy emphasises the importance of the institutional environment
of each market on economic and banking performance. In particular, the theory of political
institutions and the hierarchy of institutions hypothesis (HIH) refer to the role of political
institutions as ultimate institutions that determine and affect other institutions, such as
economic and regulatory, and their critical impact on economic and banking performance.
To investigate the relationship between institutions and banking, this study first identifies the
theoretical differences between conventional and Islamic institutions; theoretical
relationships between institutions and banking sectors; and the existing research performance
on this topic using a systematic literature review method. Second, it empirically examines the
impact of institutional environments, including political, economic, regulatory, and Islamic
institutions, on bank efficiency. By conducting a panel regression analysis with a sample of
594 banks in 18 countries from 2005 to 2020, this study ascertains the connection between
institutions and bank efficiency. Finally, it explores the association of institutional
environments and bank liquidity creation. To achieve this aim, this study employs a crosscountry analysis of 584 banks from 18 countries from 2000 to 2020.
This study offers several interesting results. First, although Islamic institutions share common
aspects with conventional institutions, such as the acknowledgement of democratic values in
society, they have distinct and additional institutional features. For instance, aspects such as
definition, features, elements, and requirements differ in Islamic views from the conventional
ones because of their sources and purposes. Consequently, the Islamic perspective on
democracy is derived from the ultimate religious sources of Islam. Second, while there have
been clear theoretical relationships between political, economic, and regulatory institutions
and banking performance, empirical research on this issue has not been conducted well in the
conventional and Islamic banking literature. Third, by means of a quantitative methodology,
this study finds that political institutions positively affect both bank efficiency and liquidity
creation. Fourthly, the impact of economic and regulatory institutions varies according to the
presence of high-quality political institutions. This result empirically reinforces the theory of
the hierarchy of institutions hypothesis (HIH) by confirming the vital and ultimate role of
political institutions and their binding effect on bank performance. Finally, this study finds
that Islamic institutions positively influence Islamic bank efficiency and liquidity creation.
This result empirically supports the theory of political economy and new institutional
economics, which stresses the role of proper institutional environments.

Date of Award	2023
Original language	English
Awarding Institution	Coventry University
Supervisor	Sarkar Kabir (Supervisor), Sailesh Tanna (Supervisor), Aqsa Aziz (Supervisor) & Rashedul Hasan (Supervisor)