Online from: 2009
Subject Area: Accounting and Finance
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|Title:||Risk-taking behaviour of Islamic banks: application of prospect theory|
|Author(s):||Nafis Alam, (Nottingham University Business School, University of Nottingham Malaysia Campus, Semenyih, Malaysia), Kin Boon Tang, (Nottingham University Business School, University of Nottingham Malaysia Campus, Semenyih, Malaysia)|
|Citation:||Nafis Alam, Kin Boon Tang, (2012) "Risk-taking behaviour of Islamic banks: application of prospect theory", Qualitative Research in Financial Markets, Vol. 4 Iss: 2/3, pp.156 - 164|
|Keywords:||Banks, Islam, Islamic banks, Prospect theory, Risk management|
|Article type:||Research paper|
|DOI:||10.1108/17554171211252493 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
|Acknowledgements:||JEL classification – C14, D81, G21|
Purpose – The paper aims to gain an insight into behavioural characteristics of Islamic banks and how they influence the risk-taking decisions of Islamic banks in financial markets within the prospect theory context.
Design/methodology/approach – The study employs review and application of prospect theory in Islamic banking industry across the globe, making use of 99 Islamic banks across 14 countries.
Findings – Empirical evidence shows that Islamic banks located above target risk level tend to show risk-adverse behaviour, while banks below target risk level inclined towards risk-seeking attitude. Results also highlighted that banks which have higher loans to total asset ratio tend to take on lower risk.
Practical implications – Islamic bank regulators will be better prepared to monitor the Islamic banking system if they understand risk-taking behaviour of Islamic bank managers. The findings will provide more effective bank regulatory oversight, thus preventing Islamic bank failures in future.
Originality/value – Since there are relatively few studies conducted in risk-taking behaviour of Islamic banks, specifically global Islamic banking, this study will broaden the scope of the literature by providing novel empirical evidence on risk-taking practice of Islamic banks worldwide.
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