Title: The impact of bank capital on profitability and risk in GCC countries: Islamic vs. conventional banks

Authors: Habib Hasnaoui; Ibrahim Fatnassi

Addresses: College of Business Administration, Prince Sattam bin Abdulaziz University, Ez-Zitouna University, Kingdom of Saudi Arabia; GEF-2A Lab, High Institute of Management, University of Tunis, P.O. Box 165, Alkharj 11942, Kingdom of Saudi Arabia ' GEF-2A Lab, Tunis Business School, High Institute of Management, University of Tunis, P.O. Box no. 65, Bir El Kassaa, 2059, Tunisia

Abstract: This study analyses how capital influences profitability and risk in the context of Islamic and conventional banking in Gulf Cooperation Council (GCC) countries. It achieves this through structure-conduct-performance, moral hazard, and regulatory hypotheses. We apply the generalised method of moments (GMM) technique for dynamic panels using bank-level data from 85 banks for the 2003-2011 period. We first found that highly capitalised Islamic banks generate low profitability, while in contrast, highly capitalised conventional banks generate high profitability. Secondly, we found highly capitalised GCC banks (both Islamic and conventional) to be characterised by greater risk. Additionally, all profitability and risk variables demonstrate persistence. We then ultimately arrive at the same conclusions about capital, profitability, and risk relationship with the introduction of regulatory variables.

Keywords: bank capital; profitability; risk; Islamic finance; dynamic panel; financial regulation.

DOI: 10.1504/AAJFA.2019.100976

Afro-Asian Journal of Finance and Accounting, 2019 Vol.9 No.3, pp.243 - 268

Received: 26 Sep 2017
Accepted: 09 Dec 2017

Published online: 18 Jul 2019 *

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