Economic development and Islamic bank capital decisions: Evidence from the law and finance literature

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Using a sample of more than 100 Islamic banks operating in 28 countries over the 1999-2013 period, we find that Islamic banks increase their capital ratios in countries with better economic and financial conditions. We also find that the interaction between economic development and free media, private ownership of press, the existence of private credit registries and a democratic and durable political system have a strong positive effect on Islamic banks’ capital decisions. We conclude that Islamic banks tend to increase their retained earnings and equity base in countries where economic conditions are more favorable to growth to compete with conventional banks or to protect against any potential losses in cases of financial distress.

Author(s):

Mohammad Bitar    
John Molson School of Business
Canada