Risk, efficiency and capital in a dual banking industry: evidence from GCC banks

Abstract

Purpose

This study aims to extend the literature by simultaneously investigating the relationship between risk, efficiency and capital in the Gulf Cooperation Council (GCC) dual banking system.

Design/methodology/approach

The study employs the simultaneous-equation modeling technique with a three-stage least square estimator on 60 listed GCC commercial banks from 2005 through 2018.

Findings

Although GCC Islamic banks are more capitalized and liquid, they are riskier and less efficient than GCC conventional banks. Moreover, a higher level of capital reduces the insolvency and credit risk of GCC banks for both types of banks. However, it enhances the cost efficiency of GCC conventional banks only. GCC conventional banks also exhibit skimping behavior, while for GCC Islamic banks, cost efficiency is negatively associated with bank risk. This implies that the risk-taking behavior in Islamic banks is prompted by the incentives of the shareholders following the risk-sharing nature of Islamic banking.

Originality/value

This study differs from previous studies in many aspects. First, it relies on a recent long data set that covers the implementation of the accords of Basel II (introduced in 2004) and Basel III (introduced in 2010). Second, it estimates the efficiency of GCC banks based on separate frontiers for Islamic and conventional banks, ensuring the robustness of the results. In conclusion, to the best of the author's knowledge, this is the first study to investigate the intertemporal relationship between risk, efficiency and capital in the GCC dual banking industry.

Citation

Alsharif, M. (2021), "Risk, efficiency and capital in a dual banking industry: evidence from GCC banks", Managerial Finance, Vol. 47 No. 8, pp. 1213-1232. https://doi.org/10.1108/MF-10-2020-0529