Financial crisis, legal origin, economic status and multi-bank performance indicators

• Published in: Journal of applied accounting research 2017-05, Vol.18 (2), p.208-222
• Main Authors: Al-Nasser Mohammed, Sulaiman Abdullah Saif, Joriah Muhammed, Datin
• Format: Article
• Language: English
• Subjects: Banking industry; Banks; Business models; Developing countries; Economic crisis; Economic growth; Efficiency; Financial performance; Gambling; GDP; Gross Domestic Product; Hypotheses; Interest rates; International finance; Islamic financing; LDCs; Macroeconomics; Performance evaluation; Profitability; Return on assets; Studies; Transition economies
• ISSN: 0967-5426; 1758-8855
• DOI: 10.1108/JAAR-07-2014-0065

Purpose The purpose of this paper is to investigate the performance of Islamic banks in developing countries from 2007 to 2010 which includes the period of the financial crisis by empirically examining the way in which the macroeconomy affected Islamic banking performance (IBP) in developing countries. The empirical examination involves two approaches of measuring performance: Sharia-based and conventional-based performance measurement. Design/methodology/approach For this paper, the authors have utilized a Data Stream/Bank Scope database and data from the Bank Negara Malaysia (Malaysian Central Bank) to collect a panel set of annual financial information for Islamic banking from the year 2007-2010. The initial sample covers 34 Islamic banks from developing countries that are listed on the International Islamic Service Board. Furthermore, the authors adopted only those listed Islamic banks to tackle the data availability issue. The authors’ final sample comprised 136 observations with complete data as the numbers of Islamic banks in developing countries are low in comparison to their conventional peers. The financial crisis dummy follows America’s commonly used National Bureau of Economic Research timeline for the financial crisis. The authors also used the method of a generalized least square (GLS) method of pooled panel data analysis regression model. The rationale for employing the GLS technique was made on the basis of the ability of GLS to give less weight to the error term that is closely clustered around the mean, to improve the goodness of fit and to remove autocorrelation compared with normal, random, and fixed effect models. Findings The authors of this paper found that the macroeconomic factors reflected in gross domestic product, gross domestic product growth, and inflation rate have a significant positive relationship with the return on assets. In addition, a significant negative relationship was found between the financial dummy and IBP in developing countries. On the other hand, it failed to find evidence of a relationship between the macroeconomic factors and performance including the legal system and the financial crisis dummy, when the performance is reflected by the Zakat ratio. The result embedded that the financial crisis had an impact on the performance of Islamic banks in developing countries when viewed from the conventional banking perspective. The financial crisis played a role in reducing the profitability of Islamic banks which