Capital structure of Islamic banks: How different are they from conventional banks?

This paper uses comprehensive data for 112 Islamic and 709 conventional banks from 23 countries over 1995–2015 to compare the capital structure of Islamic banks (IBs) and conventional banks (CBs) from several perspectives. We find that IBs and CBs seem to face different cost pressures in the process...

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Bibliographic Details
Published inGlobal finance journal Vol. 54; p. 100634
Main Authors Hoque, Hafiz, Liu, Heng
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.11.2022
Subjects
Asset growth
Capital structure
Islamic banking
Regulatory capital
Trade-off theory
Islamic banking
Regulatory capital
Trade-off theory
Asset growth
G21
G32
Capital structure
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Summary:This paper uses comprehensive data for 112 Islamic and 709 conventional banks from 23 countries over 1995–2015 to compare the capital structure of Islamic banks (IBs) and conventional banks (CBs) from several perspectives. We find that IBs and CBs seem to face different cost pressures in the process of adjusting towards the target capital structure. Asset growth is a key driver of capital structure change, and CBs adjust leverage more aggressively in response to changes in total assets compared to IBs, because they have an advantage in obtaining external funds and can achieve leverage adjustments faster and at a low cost. IBs have more regulatory capital, but their ability to respond to risks is weaker than traditional banks. The results of this paper suggest that Islamic banks are in a disadvantaged position compared to CBs in capital structure management. The conclusion suggests that IBs need to expand its financing tools and funding sources to reduce adjustment costs and improve their capability to deal with asset risk.
ISSN:1044-0283
1873-5665
DOI:10.1016/j.gfj.2021.100634