Risk and Stability in Islamic Banking

Electronic copy available at: http://ssrn.
com/abstract=1663406
1
Risk and Stability in Islamic Banking
Pejman Abedifar*
c
, Amine Tarazi*, Philip Molyneux

* Universit de Limoges, LAPE, 5 rue Flix Ebou, 87031 Limoges Cedex, France
Bangor Business School, University of Wales, Bangor, LL57 2DG, UK
C. Corresponding Author. E-mail: pejman.abedifar@etu.unilim.fr

Preliminary draft: do not quote without the permission of the authors

NOVEMBER 2010

Abstract
This paper investigates risk and stability features of Islamic banking using a
simultaneous modeling framework and a sample of 456 banks from 22 countries
between 2001 and 2008. We find that Islamic banks appear to have similar credit and
insolvency risk features as conventional banks. Smaller Islamic banks, however, have
a lower exposure to credit risk than similar-sized conventional counterparts. We also
find evidence suggesting the limited role played by profit-and-loss-sharing (PLS)
contracts. Our results are robust to different samples, estimation procedures, risk and
other modeling specifications.

Key Words: Islamic Banking, Islamic Finance, bank risk, credit risk, stability,
insolvency, z-score

Electronic copy available at: http://ssrn.com/abstract=1663406
2
Introduction
The world has observed various evolutionary stages in the field of banking and
currently we see that Islamic Banking is expanding fast. According to the Banker (2009)
report on the top 500 Islamic Financial Institutions, assets held by Islamic banks or
Islamic windows of conventional banks increased by 28.6% to $ 822bn from $639bn in
2008, while the annual asset growth of conventional banks was only 6.8%. Islamic
banking is not only practised in Islamic countries but it has also expanded to the other
continents like Europe and the Americas. Islamic finance and banking is a relatively new
area and studies on its impact, viability and overall role in the finanical markets is not
well documented in the academic literature.
Islamic finance has evolved on the basis of Shari, which forbids payment or
receipt of Riba the payment or receipt of interest (Obaidullah, 2005). Financing
principles are governed by Islamic rules on transactions Figh Al-Muamelat and follow
both profit and loss sharing (PLS) and non-PLS arrangements (such as leasing style
arrangements). In addition to being prohibited from dealing with any transactions
involving interest, Islamic banks also face other restrictions such as the use of
derivatives, because according to Shari all contracts should be free from excessive
uncertainty Gharar (Obaidullah, 2005).
Several studies have outlined the specific risks inherent in Islamic banking.
Errico and Farahbakhsh (1998) point out that prudential supervision and regulations
governing Islamic banks should place a greater emphasis on operational risk and
information disclosure. They explain the special risks attached to PLS. For instance,
Islamic banks cannot mitigate credit risk by demanding collateral from borrowers;
moreover, they do not have enough control over the management of projects financed in
the form of Mudarabah
1

1
It is an Islamic mode of finance. Refer to Khan (1991), Khan (1992), Ahmad (1993) and Iqbal and
Mirakhor (2007) for more details of Islamic financial instruments.
. Khan and Ahmad (2001) claim that the level of operational and
legal risks associated with Islamic modes of finance is higher than in conventional
finance. This is because of the special framework under which Islamic banks extend
credit. Sundararajan and Errico (2002) suggest that the complexities of PLS modes of
Electronic copy available at: http://ssrn.com/abstract=1663406
3
finance and the risks associated with the non-PLS activities should be taken into account
to establish more effective risk management. They also point out various moral hazard
issues that occur as a result of the special relationship between Islamic banks and
investment account holders. Obaidullah (2005) argues that (deposit) withdrawal risk may
persuade Islamic banks to deviate from traditional Sharia financing principles. This
occurs if banks pay competitive market returns to investment account holders regardless
of the banks actual performance.
Only a handful of studies have empirically addressed these issues. Cihak and
Hesse (2008), for instance, empirically compare the stability of Islamic versus
conventional banks. The results show that small Islamic banks are more stable than
similar sized conventional institutions. Large Islamic banks, however, are less stable than
their conventional counterparts.
2
Mudaraba and Musharakah) play a minor role in Pakistani Islamic banking amounting to
less than 2% of their (Islamic) loan sample. Using a hazard modelling approach and
controlling for a variety of factors, the main finding is that default rates on Islamic loans
Chong and Liu (2009), studying the Malaysian banking
industry, claim that Islamic banks, in practice, are not too different from conventional
banks. Using a Granger causality test they show that rates of return on the investment
deposits of Islamic banks are closely related conventional banks deposit interest rates.
This is explained by competition pressures from conventional banks constraining the
actual rates offered by Islamic banks. The aforementioned study also notes that, on the
asset side, Malaysian Islamic banks apply PLS contracts for 0.5% of their financing.
Baele et al (2010) examine default risk for Islamic and conventional loans using data
obtained from the Pakistani Credit Information Bureau between April 2006 and
December 2008. The sample covers all business loans outstanding over the period.
Similar to Chong and Liu (2009), Baele et al (2010) also note that PLS contracts (such as

2
They employ the Z-score used by Boyd and Runkle (1993) as the stability indicator and they use the
Bankscope database classification to distinguish between Islamic and other types of banks. This is a
limitation as Bankscope classifies banks as commercial, Islamic or other types. However an Islamic bank
can be a commercial or a non-commercial bank. Such a classification is problematic: (1) In Bankscope
some Islamic banks are mistakenly categorized as commercial banks. (2) Some Islamic banks are
investment banks or other types that are not comparable with commercial banks. (3) The data-set also
does not differentiate between conventional banks with Islamic windows and other conventional banks.
4
are lower than for conventional loans. This may be explained by a greater reluctance of
borrowers to default on such loans for religious reasons.
This paper attempts to contribute to the aforementioned literature by investigating
credit and insolvency risk for a sample of Islamic and conventional banks from 22
member countries of the Organization of Islamic Conference (OIC) over 2001 to 2008.
Overall we find that Islamic banks appear to be as stable as their conventional
counterparts. The credit risk of large Islamic banks is not significantly different from
similar-sized conventional banks, while small Islamic banks exhibit lower levels of credit
risk compared to similar sized conventional banks. The paper is organized as follows:
Section I discusses the key features of Islamic finance and risk issues and Section II
outlines our methodology. Section III describes the data and Section IV presents the
results. Finally section V concludes.

I. Background on Islamic banking
This section briefly explains the key features of Islamic finance and its possible
impact on the risk and stability of Islamic banks.
I.I. Features of Islamic Finance
Islamic finance is based on Shari principles which forbid payment or receipt of
Riba
3
Islamic finance has evolved on the basis of Islamic rules on transactions, Figh al-
Muamalat, and it can mainly be categorized as: 1) Debt-based financing: the financier
purchases or has the underlying assets constructed or purchased and then this is sold to
. Riba means an excess to be returned on money lending. The Islamic terminology
for such a kind of lending is Qard Al-Hasan. It is interesting to note that Shari
recognizes the time value of money, since according to the Islamic rules the price of a
good to be sold on a deferred payment basis can be different from its current value.
Interest reflects the time value of money and the interest rate is an exchange rate across
time. While Shari recognizes interest in business, it prohibits interest on lending.

3
There are two types of Riba: Riba in debt and Riba in exchange. This paper focuses only on Riba in debt.
5
the client. The sale would be on a deferred-payment basis with one or several
installments. 2) Lease-based financing: the financier purchases or has the underlying
assets constructed or purchased and then rents it to the client. At the end of the rental
period or proportionate to the rentals the ownership would be transferred wholly or
partially to the client. 3) PLS financing: the financier is the partner of the client and the
realized profit or loss would be shared according to the pre-agreed proportion (Khan and
Ahmed, 2001). The first two Islamic finance methods are collectively known as Non-
Profit and Loss Sharing Non-PLS. Besides restrictions on Riba, Shari has some other
prohibitions which should be taken into account. For instance, according to the Shari all
contracts should be free from excessive uncertainty Gharar (Obaidullah, 2005), hence
Islamic financial institutions face some restrictions on application of financial derivatives
and insurance policies.

I.II. Are Islamic Banks Riskier than Conventional Banks?
In this section, the asset and liabilities structure of Islamic banks are analyzed
highlighting the specific risk features.
Liabilities
Islamic banks are authorized to receive deposits mainly in the following two
forms (Iqbal, et.al., 1998): current accounts
4
Due to the obligations towards depositors as debt-holders, conventional banks aim
to allocate a considerable part of their funds to loans, and endeavor to decrease the
that bear no interest but are obliged to pay
principal to holders on demand, and investment (or savings) accounts that generate a
return based on profit rates. Such rates may be adjusted according to the realized profit or
even loss which would then be shared between the Islamic bank and the investment
account holders. This PLS arrangement can (in theory at least) provide pro-cyclical
protection to banks in the event of adverse conditions profit rates decline in bad times
and increase in good times. The extent to which investment deposits are important as a
source of funding, therefore, can have an impact on the asset portfolio of Islamic banks.

4
Deposits are received by Islamic banks in the form of Qard Al-Hasan or Amanaa.
6
volatility and uncertainty of loan revenues so as to meet depositor obligations. Islamic
banks, however, have more flexibility, since they can consider investment depositors
more like equity holders. However, this flexibility may be mitigated by the fact that
Islamic banks only have limited access to wholesale funding. There is a fledgling Islamic
money market (noticeably in Bahrain and Malaysia) although only the largest institutions
have access. As such Islamic banks are rather constrained from engaging in active
liability management like conventional banks.
Assets
The special relationship with investment account holders may have various
impacts on Islamic banks behavior. It may weaken incentives to ensure due diligence
and loan monitoring (Sundararajan and Errico, 2002). Alternatively, the special
relationship can discipline Islamic banks more effectively as compared to conventional
banks, since investment accounts holders have greater incentives to monitor the
performance of Islamic banks (compared to conventional banks). In addition, the greater
potential withdrawal risk (Khan and Ahmed, 2001) can discipline Islamic banks to be
more active than their conventional counterparts in monitoring their loan and investment
activities.
Sharing the realized profit or loss with investment account holders may make
Islamic banks more risky. On the upside, larger payouts to investment account holders
may increase deposits and this can force bank shareholders to raise more equity capital in
order to maintain capital ratios and prevent dilution of their ownership rights. Conversely,
poor payouts may encourage deposit withdrawals leading to potential liquidity and
(ultimately) solvency problems.
Islamic Banking: Principles and Practice
Islamic banks, in practice, tend to deviate from the above mentioned financing
principles and operate similarly to conventional banks. Obaidullah (2005) and Aziz
(2006) claim that the withdrawal risk may persuade management to deviate from PLS
principles by paying competitive market returns to investment account holders regardless
of realized performance. Chong and Liu (2009) use Malaysian data to show that
7
investment deposit rates of Islamic banks are closely linked to those of their conventional
counterparts. They argue that competitive pressure from conventional banks constrains
the actual implementation of PLS arrangements. Nevertheless, it is noted that in the
likelihood of crisis, management are highly likely to share realized losses with investment
account holders to avoid insolvency. This suggests that Islamic banks may have a slightly
greater capacity to bear losses compared to conventional banks. When Islamic banks are
performing well they may adjust profit rates upward but at a slower rate than realized
profitability so as to limit the level and volatility of deposit inflows.
Implicitly, investment account holders own a bond, a long position on a call
option and a short position on a put option. The strike price of the call, however, is
determined arbitrarily by Islamic banks, in the absence of supportive regulations on the
account holders rights. The strike price of the put is determined based on the degree of
market competitive pressures, level of incurred loss and the capital ratio of the Islamic
bank. Figure 1 illustrates how the special relationship between investment account
holders and Islamic banks work in theory and practice as compared to depositors of
conventional banks, in the absence of a deposit insurance scheme
5
[FIGURE 1]
.
Islamic banks, in practice, tend to apply the non-PLS paradigm, possibly due to
the risks associated with the PLS method. For instance, Chong and Liu (2009) show that
in Malaysia, only 0.5% of Islamic bank finance is based on the PLS. Dar and Presley
(2000) claim that even Mudarabah companies in Pakistan, which are supposed to operate
in the form of PLS mainly follow the Non-PLS modes of finance. (This is also
emphasized by Baele et al, 2010). According to the Bank Indonesia (2009) the PLS
modes of finance accounted for 35.7% in the finance portfolios of Islamic banks
operating in the country by the end of 2008. Milles and Presley (1999) also point-out that
PLS is only marginally practiced in Bangladesh, Egypt, Iran, Pakistan, Philippines and
Sudan. While Islamic banks appear to refrain from practicing PLS modes of finance they

5
Some countries such as Lebanon and Indonesia have introduced a formal deposit insurance scheme and
the deposits held by Islamic banks are insured in the same way as the deposits held by conventional banks.
Based on the type of the scheme and the coverage ceiling, the incurred loss of depositors (investment
account holders) should be differently limited.
8
still face possible greater withdrawal risks than conventional banks (Khan and Ahmad,
2001; and Sundararajan and Errico, 2002).
Investment Limitations
In addition to lending, banks also allocate a part of their funds to investments.
Such investments normally include purchase of bonds of different types that have
risk/return features that help manage portfolio risk. However, Islamic banks have limited
options for such investments, since they are not authorized to invest in bonds other than
Sukuk
6
Complexity of Islamic Modes of Finance
. This limitation has been weakened overtime due to the expansion of alternative
Islamic financing instruments overtime although it remains the case that Islamic banks
have less flexibility in managing their investments and other earning assets than
conventional banks.
Islamic financing agreements
7
, even for Non-PLS methods, are not as
straightforward as conventional loan contracts (and according to anecdotal evidence also
take longer to process). Generally, in debt-based or lease-based finance, such as
Murabaha, Islamic banks arrange for the goods/projects to be purchased/ implemented
and then sell these on for a rent to clients. For purchase/implementation of the
goods/projects, Islamic banks normally appoint the client as their agent. Such a
framework is somewhat complicated as compared to conventional loan contracts.
Sundarajan and Errico (2002) note the specific risks attached to various Non-PLS
methods, such as Salam
8
and Ijara
9
Another area of debate relates to the treatment of default penalties. Some
jurisdictions rule that such penalties are not authorized by Sharia, so banks make use of
. In the former, Islamic banks are exposed to both
credit and commodity price risks; in the latter, unlike conventional lease contracts,
Islamic banks cannot transfer ownership and therefore have to bear all the risks until the
end of the lease period.

6
They are similar in nature to debt certificate.
7
See Khan (1991), Khan (1992), Ahmad (1993) and Iqbal and Mirakhor (2007) for details on the features
of various Islamic financial instruments.
8
Similar in nature to futures contracts.
9
Similar in nature to conventional leasing contracts.
9
rebates instead (Khan and Ahmed, 2001). Here the mark-up on the finance arrangement
implicitly covers the return to the banks as well as a default penalty component. If the
client repays the loan in a timely manner then they will receive the rebate. While default
interest payments are typically calculated over the delayed period in conventional
banking, some Islamic banks collect the delayed penalty over the whole financing period.
In addition Islamic banks can also face restrictions regarding the use of derivatives as
well as different types of collateral, for instance, they are not authorized to use interest-
based assets, like bonds, for security (Khan and Ahmed, 2001).
Overall, Islamic banking is characterized by various activities that appear on the
one hand to reduce risk (e.g. PLS sharing) and the other to increase risk (e.g. limited tools
for active balance sheet management). As such, whether Islamic banking is more or less
risky than conventional banking is an empirical question. The following section outlines
the methodology used to investigate this issue.

II. Methodology and Econometric Specifications
In order to analyze the risk features of Islamic and conventional banking we adopt
an approach similar to Altunbas et. al. (2007) and Fiordelisi et. al. (2010) to examine
risk, capital and bank efficiency relationships. We first investigate credit risk
relationships between Islamic and conventional banks using a simultaneous modeling
approach. We then investigate insolvency risk using a single model set-up.
Relationships between Risk, Capital and Efficiency
Several studies investigate the relationship between risk, capital and efficiency in
banking
10

10
Refer to Shrieves and Dahl (1992), Jacques and Nigro (1997), Kwan and Eisenbeis (1997), Hughes and
Mester (1998) and Altunbas et al. (2007) and Fiordelisi et al. (2010).
. Shrieves and Dahl (1992), Jacques and Nigro (1997) and Rime (2001), for
instance, consider contemporaneous links between capital and risk and find there is a
positive relationship namely, increases in risk encourage banks to grow their capital.
Alternatively, the level of capital might have positive or negative impact on the riskiness
of bank loans. Kahane (1977), Koehn and Santomero (1980) and Kim and Santomero
10
(1980) claim that banks may increase their risks in response to regulatory requirements
for higher levels of capital, since such actions by regulators limits the return-risk frontier
and therefore encourages banks to select riskier asset portfolios. Furlong and Keely
(1989) and Keely and Furlong (1990) argue that the option value of deposit insurance is
decreasing in banks leverage so institutions with relatively high levels of risk and
leverage have greater incentives to exploit deposit insurance subsidies incentivizing
greater risk-taking. Konishi and Yasuda (2004) use Japanese data to show that capital
adequacy requirement decrease bank risk-taking incentives.
Jensen (1986) and Harris and Raviv (1990) discuss the possible impact of capital
on inefficiency. They argue that when capital is more expensive than debt (at the margin)
management might endeavor to reduce operating costs to offset the higher financial costs
of the capital raise required by the regulators. On the other hand, a fall in interest
expenses may reduce managerial attempts to control operating expenses. Kwan and
Eisenbeis (1997) find a positive relationship between inefficiency and capital since
regulators require inefficient banks to hold a higher level of capital. Using the
simultaneous equations technique, they also show that the inefficiency would increase the
risk taking which supports the moral hazard hypothesis that poor banks have more
incentive for risk taking.
Hughes and Moon (1995) and Hughes and Mester (1998) claim that risk and
capital may be determined simultaneously taking into account the level of efficiency. The
regulators may authorize an efficient bank to exhibit higher leverage. Less efficient banks
may try to increase their risk levels to reach higher levels of profit to compensate for
losses incurred due to inefficiency. Berger and DeYoung (1997) argue that a bank, which
does not efficiently monitor its loan activities, is unlikely to be very efficient in its
operations. Efficiency and risk might also move in the same direction if banks, in an
attempt to maximize short-term profit, decide to become more cost efficient by dedicating
fewer resources to loan screening and monitoring.
Altunbas et. al. (2007), use Zellners (1962) seemingly unrelated regression
(SUR) approach
11

11
This approach controls for contemporaneous correlation among the equations error terms.
to estimate a system of equations for risk, capital and efficiency. They
11
show that inefficient European banks take less risk but hold more capital. They also find
a positive relationship between risk and capital, possibly because banks with a higher
level of risk are required to hold more capital. In a similar vein, Fiordelisi et al (2010)
examine risk and efficiency dimensions in European banking, using a similar model set-
up although individual risk (accounting and market-based measures), efficiency (cost and
revenue) and capital models are estimated using GMM in order to test for causal
relationships. They find that reductions in efficiency cause increases in bank risk and that
improvements in efficiency strengthens bank capital.
Model Specification for Credit Risk
Following from the aforementioned literature we investigate the credit risk
features of Islamic versus conventional banks by estimating the following system of
equations:
, 1 1,1 , 1,2 , ,
1
1,1 1,2 ,
1,1 1,2 , , ,
3 2
1,
1, 1 , , , ,
1 1
i t i t i t i t
i t
i t i t i t
l
k i t k i t l
k l
LoanRisk c IslamicBankD IslamicWindowD Size
Equity Inefficiency Liquidity
LoansGrowth
OwnershipStructureD AgeD

= =
= + + +
+ + + +
+ + +

7 21
1, 1, ,
,
1 1
t n i t
t n
t n
CountryD
YearD

= =
+ +

(1)

2 2,1 , 2,2 , ,
2 ,
2,1 , 2,2 ,
2,1 ,
3 2 7 21
2, 2,
2, 2, , , , ,
1 1 1 1
i t i t i t
i t
i t i t
i t
l t n
k t i t k i t l
k l t n
Equity
c IslamicBankD IslamicWindowD Size
Inefficiency
LoanRisk ROAA
YearD

= = = =
= + + +
+ + +
+ + + +

2, , i t
n
CountryD

+
(2)

3 3,1 , 3,2 , ,
3 ,
3 2 7
3,
3, 3, , , , ,
1 1 1
3,1 , 3,2 , ,
3,1
i t i t i t
i t
l t
k t i t k i t l
k l t
i t i t i t
Inefficiency
Equity NonInterestIncome
LoanRisk
Ye
= = =
= + + +
+
+ + +
+ +

21
3, 3, ,
1
n i t
n
n
CountryD
arD
=
+ +
(3)

Credit risk (LoanRisk), equity capital (Equity) and inefficiency (Inefficiency) are
modeled in equations 1 to 3, respectively. The effect of being an Islamic bank is captured
in the dummy variable which takes the value of one when the bank is Islamic and zero
otherwise. Conventional banks with Islamic windows are also represented by the dummy
variable.

12
Control Variables
Several factors are controlled for in the estimation including: bank size, liquidity,
loan growth, non-interest income, profitability, ownership structure, banks age, and time
and country dummies. The logarithm of total asset is considered as a proxy for size.
Large banks can more benefit from both scale economies and diversification as claimed
by Hughes et al. (2001). At the same time, bigger banks might be more risky, since they
may try and exploit Too-Big-To-Fail safety net subsidies (Kane, 2010). A variety of
bank-specific indicators are included in the model: equity capital , inefficiency, liquidity,
loans growth, returns on average assets and the share of non-interest income to total
operating income, are incorporated to control for the possible impact of banks financial
performance and structure on their risk level.
Liquidity and loan growth are controlled for in the first equation. The more
liquidity a bank has maybe suggestive of lower liquidity risk but also lower returns (as
liquid assets tend to yield returns less than loans). It is important to control for loans
growth as a considerable increase in credit may be reflective of weakening screening
standards and therefore higher risk.
Berger (1995) shows the positive impact of earnings on capital and therefore we
include returns on average assets as an explanatory variable in our capital equation. The
ratio of non-interest income to total operating income is also controlled for in the
inefficiency equation, since DeYoung and Roland (2001) show that non-interest income
can change the structure of a banks cost, leading to higher operating leverage.
Bank ownership structure should be also taken into account. La Porta et. al.
(2002) analyze government ownership of large banks in 92 countries and show that it
reduces efficiency. Bonin et. al. (2007) investigate the impact of ownership on bank
efficiency for eleven transition countries and find that foreign-owned banks are more cost
efficient than other banks. Iannotta et. al. (2007) using a sample of 181 large banks from
15 European countries claim that state-owned banks have poorer loan quality and higher
insolvency risk than other types of banks. In our model, we classify banks in four
13
categories
12
State-owned banks may invest in risky projects as a result of political influence,
or/and they may also enjoy some benefits and informational rents from political bodies.
Foreign-owners can face greater risk in monitoring the banks activities since they may
be less familiar with legal and judicial setting in which they operate. Alternatively, due to
such problems they may pursue relatively conservative strategies. A subsidiary, on the
one hand, might structure a risky portfolio of loans, simply because such a portfolio can
beneficially contribute to diversification of the parents overall portfolio. Failure of a
subsidiary may not be viewed as undesirable in the event of a crisis if reputational risks
are low.
: domestic state-owned banks, domestic private-owned banks, foreign-owned
banks and subsidiaries. Domestic private-owned banks are used as the benchmark and
hence three dummies are introduced to represent the other banks.
We also consider the age of the bank by defining two dummy variables. Banks
with at most three years of operation are categorized as young banks and those which
have been operating for a period ranging from three to seven years are considered as
middle aged. Other banks, called matured banks, are considered as the benchmark. The
age of banks is expected to account for the level of experience. Older banks have clearer
information and experience on dealing with clients. On the other hand, young banks
might over-estimate the quality of their recent loans, classifying a lower percentage of
them as problem loans and allocate less reserves and provisions than what is actually
required. Alternatively, younger banks might also hold less risky loans if they are more
conservative in their activities. Year and country dummy variables are also introduced in
the regressions to control for cross-country and time variations.

12
We classify a bank as a state-owned bank when at least fifty percent of the equity belongs to the
government. Similarly, at least fifty percent of a bank should be owned by one or more foreign
entity(ies) to be classified as a foreign-owned bank. A bank which is owned by a foreign government is
considered as a foreign-owned bank. We assume that although a government may decide to invest in a
bank abroad based on political ties with the host country, it will not intervene in the banks operation as
intensively as the host countrys government.
14
Model Specification for Insolvency Risk
The modeling approach to investigating insolvency is as follows
13
1 2
1
1 2 3 4
3 21
,
1 1
i i i
i
i i
i i
n i
k i k n
k n
Stability
Liquidity Inefficiency
AssetGrowth NonInterestIncome
OwnershipStructureD CountryD

= =
= + + +
+ + + +
+ + +

:

(4)

Two dummy variables aim to capture whether insolvency risk of Islamic banks
and banks with Islamic window are significantly different from that of conventional
banks. To compare insolvency risk of Islamic banks with conventional banks, we control
for the ratio of non-interest income to total operating income, size, asset growth,
inefficiency, liquidity, ownership structure and country level factors. According to
previous studies, an increase in the share of non-interest income to total operating income
is expected to inversely impact stability. De Young and Roland (2001) and Stiroh (2004,
2006), for instance, claim that the increased reliance on non-interest income has raised
the volatility of bank portfolios without increasing average profits. Lepetit et al. (2008)
show that European banks with higher non-interest income share in their net operating
income, have higher insolvency risk. Asset growth is also incorporated in the model to
control for the growth strategy of banks and the other control variables have been
explained earlier. (See Annex 1 for a summary of the loan and insolvency risks proxies,
variables of interest and control variables).

III. Data and Variables
Data
The empirical analysis is based on cross-country evidence. The data has been
obtained from the Bankscope database and the web sites of individual banks. The
Bankscope classification for Islamic banks is incorrect in places so all banks have been
cross-checked with their websites to ensure accuracy in classification. The sample covers
2674 observations for 456 commercial banks, across 22 countries members of OIC

13
We adopt a single equation set-up, since the insolvency risk proxies account for the degree of leverage.
15
wherein Islamic banking is practiced, over the period 2001-2008. Our sample comprises
100 Islamic commercial banks, 72 conventional commercial banks with Islamic
window/branches and 284 conventional commercial banks. Outliers and observations for
countries with less than 1% of the total number of observations are eliminated
(observations belonging to Iraq, Palestine and Brunei are dropped from the sample).
Annex 3 (Table A) presents the number of observations of Islamic banks,
conventional banks and conventional banks with Islamic Window across 22 countries.
For Iran and Sudan observations are only available for Islamic banks as the banking
system is 100% Riba-free. In other countries, both Islamic and conventional banking are
authorized and practiced. The largest number of observations is from Indonesia and the
lowest from Gambia. Approximately, 19% of the total observations are for Islamic banks,
conventional banks with Islamic window banks represent 17% of the sample (the
remaining 64% relate to conventional banks). Table B of Annex 3 shows the different
types of banks in terms of their ownership structure and age. As expected, Islamic banks
are relatively younger than conventional banks. The table also shows that the number of
banks with foreign owners is higher for Islamic compared to conventional banks.
The full sample is split to two sub-samples to incorporate small and large banks.
Banks with total assets less than $US 1 billion are classified as small. De Young, et. al.
(2004) claim that small and large banks operate differently - small banks generally deal
with small companies, which are relatively opaque. Large banks, on the other hand, can
benefit from economies of scale, standardized products and are more transaction (as
opposed to relationship) based. They mostly analyze hard information obtained from
transparent firms. Hence, empirical investigation of the sub-samples might show the
possible impact of different customer relationships on the credit risk of Islamic versus
conventional banks.
Credit Risk
We employ three proxies for credit risk (Loan Risk): the ratio of problem loans to
gross loans (PLGL), the ratio of loan-loss reserves to gross loans (LLRGL) and the ratio
of loan-loss provisions to average gross loans (LLPAGL). These proxies are in-line with
the variables used by Angbazo (1997), Kwan and Eisenbeis (1997), Shiers (2002),
16
Konishi and Yasuda (2002), Cebenoyan and Strahan (2004), Gonzalez (2004), Altunbas
et al. (2007) and Lepetit et al. (2008). Nevertheless, these indicators of credit risk only
partly reflect the quality of the loan portfolio, since differences across banks may be due
to different internal policies regarding problem loan classification, reserve requirements
and write-off policies.
Insolvency Risk
Two different proxies are used to represent insolvency risk: Z-Score as well as the
ratio of Unreserved Impaired Loans
14
( )
( )
E ROA ETA
Zscore
SD ROA
+
=
to Equity UIL. The Z-Score is a stability
indicator widely used in the literature (see, for instance, Goyeau and Tarazi, 1992; Boyd
and Runkle, 1993; Lepetit et al., 2008; Hesse and Cihak, 2007; Cihak and Hesse, 2008;
Laeven and Levine, 2009). Using accounting information on asset returns, its volatility
and leverage, the Z-Score is calculated as follows: , where E(ROA)
is the expected return on assets, ETA is the equity to asset ratio and SD(ROA) is the
standard deviation of ROA. Z-Score is inversely related to the probability of a banks
insolvency. A bank becomes insolvent when its asset value drops below its debt. The
insolvency probability can be written as P(ROA<-ETA). If we assume that ROA is
normally distributed, then the probability can be written as the standardized ROA, i.e.
( )
( )
ROA E ROA
P Zsocre
SD ROA
| |
<
|
|
\ .
. Hence the Z-Score shows the number of standard deviation that
a banks return has to fall below its expected value to deplete equity and make the bank
insolvent. A higher Z-Score implies that the bank is more stable.
Bank insolvency occurs due deterioration in the quality of assets and/or from
higher leverage. A bank with lower reserves and capital therefore is more prone to
default. UIL considers asset quality and the respective reserves together with capital as a
source of insolvency risk. This proxy shows the extent to which a bank is protected
against default and a higher ratio indicates that the bank is more risky.

14
Unreserved impaired loans are obtained by deducting loan-loss reserves from impaired loans.
17
Summary Statistics
Tables (1-A) and (1-B) illustrate sample descriptive statistics. Table (1-A)
illustrates that relatively large conventional banks establish Islamic windows.
Interestingly, while small Islamic banks have, on average, higher liquidity and non-
interest income ratios than similar-sized conventional banks, liquidity and non-interest
income of large Islamic banks are, on average, lower than those of large conventional
banks.
Table (1-B) presents the descriptive statistics on our risk measures. The table
shows that both small and large Islamic banks have significantly lower levels of credit
risk according to PLGL and LLRGL, compared to small and large conventional banks.
However our third (flow) credit risk proxy, LLPAGL, shows that loan risk of small
Islamic banks is higher than those of small conventional banks, but it exhibits no
significant difference between large Islamic and conventional banks. In terms of
insolvency risk, except higher volatility of asset returns of small Islamic banks, the mean
test results show that the z-score and its components for both small and large Islamic
banks are not significantly different from those of conventional banks. Nevertheless, the
mean test for the 3-year rolling window z-score suggests that both small and large Islamic
banks are less stable than conventional banks. On the other hands, the UIL measure
suggests that Islamic banks are, on average, less prone to insolvency compared to
conventional banks. (A correlation matrix is presented in Annex 4 and this does not
suggest any major collinearity problems among our independent variables).
[TABLE 1-A]
[TABLE 1-B]

IV. Empirical Results
Loan Risk
Table 2 presents the estimated model using the seemingly unrelated regression
approach adopted by Zellner (1962) on the basis of an unbalanced panel for the period
18
2001-2008. When we use PLGL as the proxy for credit risk, the results show that small
Islamic banks have lower risks than small conventional banks. However, credit risk is not
significantly different for large Islamic and conventional banks. Interestingly, Islamic
banks tend to have lower level of capitals when considering the full sample and small
banks sub-sample. As a robustness check, we substitute PLGL with LLRGL (annex 5).
The results show that both small and large Islamic banks have lower credit risk than
conventional banks of similar size. The capital ratio of Islamic banks is not significantly
different from that of conventional banks in full sample and small or large banks sub-
samples. Table 3 illustrates the results when we use LLPAGL as the credit risk proxy.
The results are, on the whole, in-line with the findings presented in table 2. Small Islamic
banks have less risky loans and lower capital ratios than small conventional banks. In
terms of inefficiency, we do not find any robust and significant difference between
Islamic banks and conventional banks.
The results also show that risk and capital are positively and significantly related
consistent with Altunbas et. al. (2007). Risk and inefficiency are also positively and
significantly related to each other. This is in-line with the findings of Hughes and Moon
(1995), Kwan and Eisenbeis (1997) and Hughes and Mester (1998) and contrary to the
results of Altunbas et al. (2007). Finally capital and inefficiency are negatively related
which supports the finding of Kwan and Eisenbeis (1997), but in contradiction with the
results of Altunbas et. al. (2007). The impact of size on credit risk is ambiguous, since the
regression results are different across proxies. Loan growth is associated with lower
credit risk, when the stock proxies, ie PLGL and LLRGL, are employed; however, we
find no significant relationship between the loans growth and credit risk when we use
flow proxy (LLPAGL) in the model.
In terms of ownership structure, small foreign-owned banks exhibit higher credit
risk than small domestic private-owned banks, while large foreign-owned banks are less
cost inefficient than large domestic private-owned banks, consistent with the finding of
Bonin et. al. (2007). The credit risk of sate-owned banks and subsidiaries are not
significantly different from that of domestic private-owned banks. Small subsidiaries are
more capitalized and less inefficient than small domestic private-owned banks. Finally,
19
we find that asset quality of large young banks tends to be lower than those of large
matured banks, when we use LLPAGL and LLRGL. However, the results are not robust
in case PLGL is employed as the credit risk proxy.
[TABLE 2]
[TABLE 3]
Insolvency Risk
Table 4 reports the results of the estimation using the Z-Score and its components.
The empirical results show that the stability of Islamic banks is not significantly different
from that of conventional banks. This result persists across different specifications. To
control for the outliers and skewness of the distribution, the Z-Score and its components
are logged, however, the results are not changed when we use the level of the Z-Score
and its components. Using the alternative proxy, UIL, does not change our results (see
Table 5). We find no significant impact of size, asset growth and liquidity on insolvency
risk. The results show that large banks with higher noninterest income share in total
operating income have, on average, a lower z-score. Large banks with higher inefficiency
also exhibit, on average, a lower z-score.
The insolvency risk of state-owned banks is not significantly different from that
of domestic private-owned banks. Both small and large foreign-owned banks are less
stable than small and large domestic private-owned banks, when the z-score is employed
as the proxy; however, there is no difference between these two categories of banks,
when we use UIL as the proxy. Small subsidiaries have slightly higher z-score on average
than domestic private-owned banks of the same size. However, when UIL is used as the
proxy for insolvency risk we do not find any significant difference between subsidiaries
and domestic private-owned banks.
[TABLE 4]
[TABLE 5]

20
Overall we find that Islamic banks are as stable as conventional banks. The credit
risk of large Islamic banks is also not significantly different from that of similar sized
conventional banks. This suggests that the various operational and other risks attached to
specific Islamic modes of finance do not appear to materially impact their risk and
stability. Small Islamic banks, however, have lower levels of credit risk compared to
small conventional banks. One possible explanation for this finding could be the fact that
small Islamic banks are more likely to be relatively new, conservative in their operations
and attract clients due to religious reasons that are less likely to default (as partially
suggested in Baele et al , 2010).
Other Issues and Robustness Checks
Our results are accord with the view that Islamic banks, in practice, behave
similarly to conventional banks. To further check this finding, we compare the payoffs to
depositors with profitability (ROE) for Islamic and conventional banks. Figure 2 presents
the payoffs across different banks. Figures (2-a) and (2-b) show that Islamic banks which
incur losses have paid positive returns to their investment account holders. The evidence
relates to 18 Islamic banks operating in 9 countries. This supports the findings of
Obaidullah (2005) and Aziz (2006) who argue that due to competitive pressures Islamic
banks tend to deviate from traditional PLS financing. At higher levels of ROE Islamic
banks seem to pay more to investment account holders, showing that partly share realized
profits. Table 6 exhibits the correlation between ROE and the implicit interest expense
rate across different banks. For observations above 75 percentile, only Islamic banks
exhibit positive and high correlation between ROE and the depositors payoff. It would
be interesting to note that at 25 percentile, similar to large conventional banks with
Islamic window, large Islamic banks even show negative and high correlation!
[FIGURE 2]
[TABLE 6]

21
Robustness Checks for Credit Risk Analysis
To check whether our findings persist when we consider endogeneity between
risk, capital and inefficiency, the 3SLS method is employed to estimate the system of
equations. The results are presented in Annex 6 and generally support our previous
finding. Using PLGL as the credit risk proxy, the results for the full sample and small
banks sub-sample specifications show that Islamic banks, on average, have lower loan
risk, but are more leveraged than conventional banks. However, the credit risk and
leverage of large Islamic banks are not significantly different from those of large
conventional banks. To further check the results, PLGL is replaced by LLRGL.
According to the risk equation estimates, the coefficient on the Islamic bank dummy is
negative and significant at the one percent level for the full sample and small banks sub-
sample. The results also suggest that large Islamic banks face the same level of credit risk
as similar sized conventional banks. LLPAGL is also employed as a final credit risk
proxy and we find that the credit risk of Islamic and conventional banks are similar. In
terms of inefficiency, the results support our previous finding.
Annex 7 illustrates the results when the loan risk equation is estimated alone. The
coefficient on the Islamic banks dummy is negative and significant under all
specifications of full sample and small banks sub-sample, when stock proxies are used.
Under large banks sub-sample, we find no significant difference between Islamic banks
and conventional banks using either stock or flow proxy. Overall, when we estimate the
risk equation separately, the results regarding credit risk remain almost the same.
Robustness Checks of Insolvency Risk Analysis
As a robustness check, we estimate the model, using 3-year rolling window Z-
Scores; this approach enables panel data estimations to control for unobservable factors,
but at the expense of increased noise due to the lower number of observations used to
compute standard deviations. Moreover, we use the lagged values of the explanatory
variables in our model to deal with endogeneity issues. The results are presented in
Annex 8 and are in line with previous findings. In all our specifications the stability of
Islamic banks is not significantly different from that of conventional banks.
22
V. Summary and Conclusion
This paper attempts to analyze the risk and performance features of Islamic banks.
The obligations of Islamic banks towards investment account holders are different from
those of conventional banks and hence they face different risks. Conventional banks have
to fulfill their obligations towards depositors irrespective of their profits or losses
whereas Islamic banks are supposed to share the realized profit or loss with investment
account holders. In practice, to avoid the withdrawal risk and active monitoring of
investment account holders, Islamic banks tend to deviate from the PLS principles of
Islamic finance. They pay a relatively competitive rate of return to investment account
holders, regardless of their realized profit or loss. On the asset side, Islamic banks try to
apply the non-PLS modes of Islamic finance which are in nature similar to conventional
finance. Nevertheless, Islamic banks still may face extra operational risks and concerns
because of the complexity of Islamic modes of finance and limitations in their investment
activities.
This paper investigates the credit risk and stability features of Islamic commercial
banks. We use a sample of 456 conventional and Islamic banks from 22 countries for the
period of 2001 to 2008. Our results show that the specific features of Islamic banking do
not appear to adversely affect their credit risk and stability. By controlling for various
factors we show that such banks appear to be as stable as conventional banks.
Furthermore, the credit risk of large Islamic banks is not significantly different from
similar sized conventional banks. Smaller Islamic banks, however, have a lower exposure
to credit risk than small conventional banks.
New evidence pointing towards partial deviation of Islamic banks from Islamic
financing principles is also found. For instance we find evidence that at low levels of
profitability Islamic banks tend to pay competitive returns on investment account deposits
whereas at high levels of profitability they try to some extent share realized gains
partially reflecting the PLS motive. Given the similarities in the credit and solvency risk
features of Islamic and conventional banks this would suggest there is no pressing need to
develop separate regulatory and supervisory systems to oversee the different types of
banking business.
23
References
Aigner, D.J., Lovell, C.A.K. and Schmidt, P., 1977, Formulation and estimation of
stochastic frontier production function models, Journal of Econometrics, Vol. 6, pp.
21-37.
Ahmad, A., 1993, Contemporary practices of Islamic financing techniques Research
Paper No. 20, IRTI, Islamic Development Bank, Jeddah.
Altunbas, Y., Carbo, S., Gardener, E.P.M. and Molyneux, P., 2007, Examining the
relationships between capital, risk and efficiency in European banking, European
Financial Management, Vol. 13, No. 1, pp. 49-70.
Angbazo, L., 1997, Commercial bank net interest margins, defaults risk, interest-rate
risk, and off-balance sheet banking Journal of Banking & Finance, Vol. 21, pp. 55-
87.
Baele, L., Farooq, M. and Ongena, S., 2010, Of religion and redemption: evidence from
default on Islamic loans, Working Paper.
Battese, G.E. and Coelli, T.J., 1992, Frontier production functions, technical efficiency
and panel data: With application to Paddy farmers in India, Journal of Productivity
Analysis, Vol. 3, pp. 153-169.
Beatty A., Harris, D., 1999, The effects of taxes, agency costs and information
asymmetry on earnings management: a comparison of public and private firms Rev
Acc Stud Vol. 4, pp. 299326.
Berger, A. N., 1995, The relationship between capital and earnings in banking, Journal
of Money, Credit, and Banking, Vol. 27 (2), pp. 432456.
Berger, A. N. and De Young, R., 1997, Problem loans and cost efficiency in commercial
banking, Journal of Banking and Finance, Vol. 21 (6), pp. 849870.
Bonin, J.P., Hasan, I., Wachtel, P., 2005, Bank performance, efficiency and ownership
in transition countries, Journal of Banking and Finance, Vol. 29, 31-53.
Boyd, J. H. and Runkle, D.E., 1993, Size and performance of banking firms, Journal of
Monetary Economics, Vol. 31, pp. 4767.
Cebenoyan, S.A. and Strahan, P.E., 2004, Risk management, capital structure and
lending at banks, Journal of Banking & Finance, Vol. 28, 19-43.
Chong, B.S., and Liu, M.H., 2009, Islamic banking: Interest-free or interest-based?,
Journal of Pacific-Basin Finance, Vol. 17, pp. 125-144.
ihk, M. and Hesse, H., 2008, Islamic banks and financial stability: An empirical
analysis, IMF Working Paper, No. WP/08/16.
ihk, M., Maechler, A., Schaeck, K. and Stolz, S., 2009, Who disciplines bank
managers?, IMF Working Paper, No. WP/09/272.
Dar, Humayon A., Presley, J. R., 2000, Lack of profit loss sharing in Islamic banking:
management and control imbalances, International Journal of Islamic Financial
Services, Vol. 2 (2).
24
DeYoung, R., Hunter, W.C. and Udell, G.F., 2004, The past, present, and probable
future for community banks, Journal of Financial Services Research, Vol. 25, Nos.
2-3. p. 85-133.
DeYoung R. and Roland, K. P., 2001, Product mix and earnings volatility at commercial
banks: Evidence from a degree of total leverage model, Journal of Financial
Intermediation, Vol. 10 (1), pp. 54-84.
El-Hawary, D., Wakif, G. and Iqbal, Z., 2004, Regulating Islamic financial institutions:
The nature of the regulated World Bank Policy Research Working Paper No. 3227.
Errico, L. and Farrahbaksh, M., 1998, Islamic banking: Issues in prudential regulation
and supervision, IMF Working Paper 98/30.
Fiordelisi, F., Marques-Ibanez, D. and Molyneux, P., 2010, Efficiency and risk in
European banking, Journal of Banking and Finance, Article in Press.
Furlong, F. and Keely, M., 1989, Bank capital regulation and asset risk, Economic
Review, Federal Reserve Bank of San Francisco, Spring, pp. 2040.
Gonzalez, F., 2005, Bank regulation and risk taking incentives: An international
comparison of bank risk, Journal of Banking & Finance, Vol. 29, 1153-1184.
Goyeau, D. and Tarazi, A., 1992, Evaluation du risque de defaillance bancaire en
Europe, Revue dEconomie Politique, Vol. 102 (2), pp. 249280.
Grais, W. and Pellegrini, M., 2006, corporate governance and Shariah compliance in
institutions offering Islamic financial services World Bank Policy Research Working
Paper No. 4054.
Harris, M. and Raviv, A., 1990, Capital Structure and the informational role of debt,
Journal of Finance, Vol. 45, pp. 321-349.
Hesse, H. and ihk, M., 2007, Cooperative banks and financial stability, IMF
Working Paper, No. 07/02.
Hughes, J.P. and Mester, L., 1998, Bank capitalization and cost: evidence of scale
economies in risk management and signalling, Review of Economics and Statistics,
Vol. 80 (2), pp. 31425.
Hughes, J.P., Mester, L. and Moon, C., 2001, Are scale economies in banking elusive or
illusive: Evidence obtained by incorporating capital structure and risk-taking into
models of bank production, Journal of Banking and Finance, Vol. 25 (12), 2001, pp.
21692208.
Hughes, J. P. and Moon, C., 1995, Measuring bank efficiency when managers trade
return for reduced risk, Department of Economics Rutgers University Working
Paper, No. 1995-20.
Iannota, G., Giacomo, N., Sironi, A., 2007, Ownership structure, risk and performance
in the European banking industry, Journal of Banking and Finance, Vol. 31, pp.
2127-2149.
Iqbal, M., Ausaf, A. and Khan, T., 1998, Challenges facing Islamic banking
Occasional Paper, No. 1, IRTI, Islamic Development Bank, Jeddah.
25
Iqbal, Z. and Mirakhor, A., 2007, An introduction to Islamic finance: Theory and
practice Wiley, London, ISBN 0470821884.
Jacques, K. and Nigro, P., 1997, Risk-based capital, portfolio risk, and bank capital: A
simultaneous equations approach, Journal of Economics and Business, Vol. 49 (6),
pp. 53347.
Jensen, M. C., 1986, Agency Costs of free cash flow, corporate finance and takeovers,
American Economic Review, Vol. 76 (2), pp. 32329.
Kahane, Y., 1977, Capital adequacy and the regulation of financial intermediaries,
Journal of Banking & Finance, Vol. 1 (2), pp. 207-18.
Kahf, M. and Khan, T., 1992, Principles of Islamic financing Research Paper No. 16,
IRTI, Islamic Development Bank, Jeddah.
Kanagaretnam, K. G. J. Lobo and D. H. Yang, 2005, Determinants of signaling by banks
through loan loss provisions Journal of Business Research, Vol. 58, pp. 312-320.
Kane, E., 2010, Redefining and containing systemic risk, Atlantic Economic Journal,
Vol. 38, pp. 251264.
Kao C, and C. Wu, 1994, Tests of dividend signaling using the MarshMerton model: a
generalized friction approach, Journal of Business, Vol. 67, pp. 45 68.
Keely, M. and Furlong, F., 1990, A re-examination of meanvariance analysis of bank
capital regulation, Journal of Banking and Finance, Vol. 14, pp. 6984.
Khan, M. Fahim, 1991, Comparative economics of some islamic financing techniques
Research Paper No. 12, IRTI, Islamic Development Bank, Jeddah.
Khan, T. and Ahmed, H., 2001, Risk management: An analysis of issues in Islamic
financial industry, Occasional Paper No. 5, IRTI, Islamic Development Bank,
Jeddah.
Kim, D. and Santomero, A. M., 1988, Risk in banking and capital regulation, Journal
of Finance, Vol. 43 (5), pp. 1219-33.
Koehn, M. and Santomero, A., 1980, Regulation of bank capital and portfolio risk,
Journal of Finance, Vol. 35 (5), pp. 1235-45.
Konishi, M. and Yasuda, Y., 2004, Factors affecting bank risk taking: Evidence from
Japan, Journal of Banking and Finance, Vol. 28, pp. 215-232.
Kwan, S. and Eisenbeis, R., 1997, Bank risk, capitalization and operating efficiency,
Journal of Financial Services Research, Vol. 12 (2 and 3), pp. 117-31.
Laeven, L. and Levine, R., 2009, Bank governance, regulation and risk taking, Journal
of Financial Economics, Vol. 93, pp. 259-275.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., 2002, Government Ownership of
Banks, Journal of Finance, Vol. LVII (1), pp. 265-301 .
Lepetit, L., Nys, E., Rous, P. and Tarazi, A., 2008, Bank income structure and risk: An
empirical analysis of European banks, Journal of Banking & Finance, Vol. 32, pp.
1452-1467.
26
Meeusen, W. and van den Broeck, J., 1977, Efficiency estimation from Cobb-Douglas
production functions with composed error, International Economic Review, Vol. 18,
pp. 435-444.
Mills, P. S. and Presley, J.R., 1999, Islamic finance: Theory and practice, Macmillan,
London.
Mokhtar, H.S., Abdullah, N. and Al-Habshi, S.M., 2006, Efficiency of Islamic banks in
Malaysia: A stochastic frontier approach Journal of Economic Cooperation among
Islamic Countries, Vol. 27, No. 2, pp. 3770.
Obaidullah, M. 2005, Islamic financial services Islamic Economics Research Center,
King Abdulaziz University, Jeddah, Saudi Arabia.
Ongena, S. and Smith, D.C., 2000, What determines the number of bank relationships?
Cross-country evidence, Journal of Financial Intermediation, Volume 9, 2656.
Rime, B., 2001, Capital requirements and bank behaviour: Empirical evidence for
switzerland, Journal of Banking and Finance, Vol. 25 (4), pp. 789805.
Shiers A.F., 2002, Branch banking, economic diversity and bank risk, The Quarterly
Review of Economics and Finance, Vol. 42, 587-598.
Shrieves, R.E. and Dahl, D., 1992, The Relationship between Risk and Capital in
Commercial Banks, Journal of Banking and Finance, Vol. 16 (2), pp. 43957.
Stiroh, K., 2004, Diversification in banking: Is non-interest income the answer?,
Journal of Money, Credit and Banking, Vol. 36 (5), pp. 853882.
Stiroh, K., 2006, A portfolio view of banking with interest and noninterest activities,
Journal of Money, Credit and Banking, Vol. 38 (5), pp. 1351-1361.
Sundararajan, V. and Errico, L., 2002, Islamic financial institutions and products in the
global financial system: Key issues in risk management and challenges ahead IMF
Working Paper, WP/02/192.
The Banker Report, the global finance magazine of the Financial Times and Group
HSBC Amanah, Issue November 2009.
Titman, S. and Wessels, R., 1988, The determinants of capital structure choice Journal
of Finance, Volume 43, Issue 1, 1-19.
Warfield, T.D., Wild, J.J. and Wild, K.L., 1995, Managerial ownership, accounting
choices, and informativeness of earnings, Journal of Accounting and Economics,
Vol. 20, pp. 61 91.
Zellner, A., 1962, An efficient method of estimating seemingly unrelated regression and
tests for aggregation bias, Journal of the American Statistical Association, Vol. 57
(298), pp. 348368.

27
Figure 1 Depositors Payoff in Islamic and Conventional Banking

Earnings
Depositors
Payoff
Depletion of
Islamic Banks
Capital
Loss
Depletion of
Conventional Banks
Capital
Theory of Islamic
Banking
Islamic Banking
in Practice
Conventional
Banking
28
Table 1-A General Descriptive Statistics
This table presents summary statistics for banks across 22 countries for the years 2001-2008.
TA (th $) TAG (%) NLTA (%)
GLG
(%)
ETA
(%)
LIQ (%) NNI (%)
ROAA
(%)
ROAE (%) IIER (%) Inefficiency
Small Islamic Banks
Number 270 206 259 193 260 262 198 265 266 214 183
Mean 306,349 51 45 48 16 72 32 1.6 12 4.33 1.62
SD 249,583 88 23 77 14 54 25 2.8 19 3.41 0.46
Small Conventional Banks
Number 916 733 909 724 906 902 753 904 903 900 781
Mean 365,452 29 45 24 14 66 23 1.3 11 5.26 1.61
SD 255,875 138 20 47 10 41 18 2.0 18 2.92 0.34
T-Stat. of Mean Test -3.40*** 2.70*** -0.39 4.18*** 2.76*** 1.72* 4.56*** 1.63 0.79 -3.70*** 0.24
Small ISW Banks
Number 139 109 139 109 138 137 99 137 138 135 109
Mean 433,237 32 53 28 13 53 25 1.8 17 5.43 1.53
SD 261,528 104 17 44 11 39 17 1.7 12 2.87 0.22
large Islamic Banks
Number 247 210 247 210 247 247 207 244 246 221 176
Mean 7,152,162 37 57 40 12 49 18 2.1 18 4.64 1.65
SD 9,530,585 42 16 50 8 36 13 2.1 13 3.18 0.31
Large Conventional Banks
Number 774 668 771 671 773 771 707 766 754 767 647
Mean 8,129,447 27 47 25 10 57 22 1.4 13 4.73 1.72
SD 11,700,000 144 19 39 6 28 13 1.6 18 2.62 0.32
T-Stat. of Mean Test -1.32 1.63 7.47*** 3.87*** 4.69*** -3.09*** -4.40*** 4.76*** 4.92*** -0.41 -2.51**
Large ISW Banks
Number 328 286 327 286 328 328 308 327 328 328 307
Mean 11,600,000 18 50 22 10 47 20 1.7 19 3.78 1.60
SD 13,400,000 23 14 34 6 23 10 1.3 12 2.16 0.25
Islamic Banks
Number 517 416 506 403 507 509 405 509 512 435 359
Mean 3,576,979 44 51 44 14 61 24 1.8 15 4.49 1.64
SD 7,419,696 69 21 65 12 48 21 2.5 16 3.29 0.39
Conventional Banks
Number 1690 1401 1680 1395 1679 1673 1460 1670 1657 1667 1428
Mean 3,921,270 28 46 24 12 62 23 1.3 12 5,02 1.66
SD 8,784053 141 20 43 9 36 16 1.8 18 2.80 0.33
T-Stat. of Mean Test -0.88 3.12*** 4.07*** 5.65*** 4.38*** -0.36 1.61 4.38*** 3.59*** -3.10*** -1.09
ISW Banks
Number 467 395 466 395 466 465 407 464 466 463 416
Mean 8,254,375 22 51 24 11 48 21 1.8 18 4.26 1.58
SD 12,300,000 58 15 37 8 28 12 1.5 12 2.50 0.25
TA= Total Assets, TAG=Total Assets Growth, NLTA=Net Loans to Total Asset Ratio, GLG= Gross Loans Growth,
ETA=Equity to Asset Ratio, LIQ= Liquid Assets to Deposits and Short Term Funding Ratio, NNI= Net Commission &
Trading Revenue to Total Operating Income Ratio, ROAA=Return on Average Assets, ROAE=Return on Average
Equity Ratio, IIER= Implicit Interest Expense Rate, Inefficiency=Cost Inefficiency, the estimation method is presented
in annex 4, * significant at 10%, ** significant at 5%, *** significant at 1%.

29
Table 1-B Descriptive Statistics of Risk Measure Variables
This table presents summary statistics on risk measure variables for banks across 22 countries for
the years 2001-2008.

LLRGL
(%)
PLGL
(%)
LLPAGL
(%)
UIL (%)
Log
zscore
Log
sdroaa
Log
zscorep1
Log
zscorep2
Log
zscore3rw
Log
sdroaa3rw
Log
zscorep13rw
Log
zscorep23rw
Small Is B
Number 156 60 178 42 18 19 15 18 134 139 121 136
Mean 3.74 5.21 2.09 26.0 2.59 -4.57 0.64 2.49 3.21 -5.17 1.10 3.03
SD 3.84 5.69 2.90 44.0 1.20 0.93 0.86 1.18 1.22 1.15 1.19 1.29
Small Con B
Number 723 632 861 355 78 80 74 79 520 532 488 522
Mean 9.54 10.93 1.59 40.6 3.07 -5.10 0.74 2.90 3.53 -5.56 1.20 3.41
SD 9.71 12.36 2.62 58.1 0.92 0.93 0.99 1.03 1.11 1.12 1.24 1.10
T-Stat. of
Mean Test
-12.23*** -6.48*** 2.14** -1.95* -1.59 2.24** -0.41 -1.37 -2.79*** 3.59*** -0.80 -3.17***
Small ISW B
Number 108 85 120 55 11 11 10 11 82 82 79 82
Mean 8.71 9.74 1.70 39.8 2.75 -4.83 0.63 2.64 3.26 -5.42 0.99 3.13
SD 9.48 12.02 2.48 59.8 0.57 0.60 0.53 0.57 1.02 1.04 1.54 1.01
large Is B
Number 193 119 199 77 36 36 36 36 168 168 164 168
Mean 4.31 5.20 1.26 12.4 2.77 -4.87 0.78 2.60 3.26 -5.39 1.18 3.09
SD 3.99 5.56 1.87 11.7 0.63 0.81 0.62 0.67 1.02 1.13 1.12 1.05
Large Con B
Number 701 577 741 369 108 109 99 108 519 528 507 522
Mean 6.98 8.60 1.29 28.5 2.75 -5.05 0.82 2.64 3.54 -5.77 1.42 3.37
SD 8.97 8.97 2.13 48.8 1.12 0.94 0.83 1.06 1.24 1.25 1.24 1.30
T-Stat. of
Mean Test
-6.02*** -5.38*** -0.19 -5.62*** 0.15 1.14 -0.32 -0.26 -2.99*** 3.70*** -2.26** -2.85***
Large ISW B
Number 315 283 319 145 42 42 42 42 232 232 227 232
Mean 5.14 5.93 0.88 24.2 2.97 -5.26 1.09 2.79 3.62 -5.88 1.77 3.45
SD 3.97 5.88 1.43 35.7 0.76 0.80 0.90 0.75 1.05 1.18 1.20 1.05
Is Banks
Number 349 179 377 119 54 55 51 54 302 307 285 304
Mean 4.06 5.20 1.65 17.2 2.71 -4.76 0.74 2.56 3.24 -5.29 1.15 3.06
SD 3.93 5.59 2.44 28.3 0.85 0.85 0.69 0.87 1.11 1.14 1.15 1.16
Con Banks
Number 1431 1209 1615 724 186 189 173 187 1039 1060 995 1044
Mean 8.28 9.82 1.45 34.4 2.88 -5.07 0.79 2.75 3.54 -5.67 1.31 3.39
SD 8.37 10.93 2.41 53.9 1.05 0.94 0.90 1.05 1.18 1.19 1.24 1.20
T-Stat. of
Mean Test
-13.84*** -8.83*** 1.45 -5.25*** -1.23 2.30** -0.42 -1.33 -4.10*** 5.01*** -2.05** -4.31***
ISW Banks
Number 423 368 439 200 53 53 52 53 314 314 306 314
Mean 6.05 6.81 1.10 28.5 2.93 -5.17 1.00 2.76 3.53 -5.76 1.57 3.37
SD 6.08 7.89 1.82 44.0 0.72 0.78 0.86 0.72 1.05 1.16 1.34 1.04
LLRGL=Loan Loss Reserves on Gross Loans Ratio, PLGL=Problem Loans on Gross Loans Ratio, LLPAGL=Loan Loss Provision on
Average Gross Loans, UIL=Unreserved Impaired Loans to Equity Ratio, Zscore=(M_ROAA+M_ETA)/SDROAA, M_ROAA = Mean
of ROAA over the sample period, M_ETA=Mean of ETA over the sample period, SDROAA= standard deviation of ROAA over the
sample period (banks needs to have at least five consecutive observations,) Zscorep1=M_ROAA/SDROAA,
Zscorep2=M_ETA/SDROAA, Zscore3rw=(ROAA+ETA)/SDROAA3rw, SDROAA3rw= standard deviation of ROAA over 3 years
(current year and two previous consecutive years), Zscorep13rw=ROAA/SDROAA3RW, Zscorep23rw=ETA/SDROAA3RW,
* significant at 10%, ** significant at 5%, *** significant at 1%.
30

Table 2 Regression Estimates of Loan Risk Model Using Problem Loans on Gross Loans
(PLGL) as the Proxy (SUR Simultaneous Approach)
Full Sample Small Banks Sample Large Banks Sample
Variables PLGL
Equity to
Asset Ratio
Inefficiency PLGL
Equity to
Asset Ratio
Inefficiency PLGL
Equity to
Asset Ratio
Inefficiency

Islamic Bank Dummy -0.027*** -0.015*** 0.028 -0.077*** -0.022* 0.000 0.004 0.002 0.029
(-3.16) (-2.72) (1.06) (-3.68) (-1.79) (0.01) (0.51) (0.46) (1.02)
Islamic Window Dummy -0.010 -0.018*** -0.097*** 0.001 -0.007 -0.051 -0.008 -0.013*** -0.101***
(-1.48) (-4.37) (-4.80) (0.07) (-0.65) (-1.05) (-1.48) (-3.86) (-4.99)
Log of Total Asset -0.006*** -0.021*** -0.003 -0.014* -0.053*** -0.033 -0.002 -0.007*** 0.003
(-2.86) (-18.31) (-0.43) (-1.79) (-13.45) (-1.52) (-0.75) (-4.96) (0.38)
PLGL 0.102*** 0.964*** 0.052* 0.873*** 0.011 1.276***
(5.63) (11.12) (1.95) (7.10) (0.51) (10.00)
Equity to Asset Ratio 0.102** -1.101*** 0.068 -1.338*** -0.128** -0.362*
(2.42) (-8.73) (0.89) (-6.86) (-2.47) (-1.87)
Inefficiency 0.097*** -0.047*** 0.115*** -0.049*** 0.095*** -0.019***
(10.84) (-8.35) (6.80) (-5.00) (9.87) (-3.30)
Loans Growth (%) -0.030*** -0.034*** -0.027***
(-5.22) (-3.33) (-4.40)
Liquid Asset to Deposit &
Short-Term Funding Ratio -0.012 -0.028* -0.007
(-1.37) (-1.95) (-0.73)
ROAA 1.735*** 1.905*** 1.473***
(17.08) (10.73) (14.57)
Net Com. Trad. To Total
Operating Income Ratio

-0.007 0.055 -0.037
(-0.12) (0.58) (-0.50)
State-Owned Bank Dummy 0.013 0.004 0.039 0.033 0.012 0.030 0.011 0.007 0.007
(1.62) (0.72) (1.51) (1.55) (1.02) (0.51) (1.58) (1.58) (0.25)
Foreign-Owned Bank Dummy 0.029*** -0.001 -0.091*** 0.069*** 0.006 -0.052 -0.011 -0.007 -0.075**
(2.94) (-0.17) (-2.89) (3.47) (0.55) (-0.94) (-1.10) (-1.09) (-2.02)
Subsidiary Bank Dummy 0.000 0.014*** -0.084*** 0.026* 0.038*** -0.153*** -0.002 0.004 -0.007
(0.03) (3.45) (-4.09) (1.89) (5.07) (-4.24) (-0.37) (0.86) (-0.28)
Young Bank Dummy -0.010 0.012 0.106** -0.038 -0.014 0.021 -0.015 0.007 0.155***
(-0.74) (1.43) (2.53) (-1.40) (-0.90) (0.30) (-1.12) (0.80) (3.13)
Middle-Age Bank Dummy 0.008 0.017*** -0.039 0.023 0.015 -0.104** -0.005 0.006 0.051
(0.81) (2.58) (-1.23) (1.33) (1.51) (-2.18) (-0.46) (0.80) (1.21)
Constant 0.000 0.000 1.634*** 0.000 0.000 0.000 0.000 0.000 1.573***
(.) (.) (11.94) (.) (.) (.) (.) (.) (7.77)
Year Dummies? Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country Dummies? Yes Yes Yes Yes Yes Yes Yes Yes Yes

Observations 1,230 1,230 1,230 451 451 451 779 779 779
R-squared 0.310 0.504 0.435 0.332 0.618 0.506 0.418 0.554 0.496
z-statistics in parentheses, * significant at 10%, ** significant at 5%, *** significant at 1%

31
Table 3 - Regression Estimates of Loan Risk Model using Loans Loss Provisions on Average
Gross Loans (LLPAGL) as the Proxy (SUR Simultaneous Approach)
Variables LLPAGL
Equity to
Asset Ratio
Inefficiency LLPAGL
Equity to
Asset Ratio
Inefficiency LLPAGL
Equity to
Asset Ratio
Inefficiency

Islamic Bank Dummy -0.002 -0.017*** -0.032 -0.008** -0.028*** -0.091** 0.001 -0.002 0.029
(-1.06) (-3.32) (-1.36) (-2.20) (-2.63) (-2.18) (0.75) (-0.40) (1.07)
Islamic Window Dummy -0.000 -0.020*** -0.101*** 0.000 -0.016 -0.084* -0.001 -0.012*** -0.093***
(-0.27) (-4.49) (-5.14) (0.03) (-1.39) (-1.88) (-0.60) (-3.67) (-4.52)
Log of Total Asset 0.001** -0.023*** -0.009 0.001 -0.059*** -0.029 0.001** -0.008*** -0.003
(2.07) (-18.66) (-1.48) (0.94) (-14.13) (-1.63) (2.21) (-5.55) (-0.35)
LLPAGL 0.481*** 3.602*** 0.434*** 2.479*** 0.553*** 4.483***
(5.81) (10.15) (3.38) (4.93) (6.60) (9.17)
Equity to Asset Ratio 0.018** -1.279*** 0.026** -1.249*** 0.003 -1.084***
(2.26) (-12.43) (2.07) (-8.90) (0.26) (-6.01)
Inefficiency 0.019*** -0.069*** 0.018*** -0.076*** 0.020*** -0.039***
(10.40) (-12.17) (5.31) (-7.40) (8.96) (-7.53)
Loans Growth (%) -0.000 0.001 -0.001
(-0.12) (0.30) (-0.93)
Liquid Asset to Deposit & Short-
Term Funding Ratio -0.004** -0.008*** -0.000

(-2.09) (-2.71) (-0.20)
ROAA 1.610*** 1.940*** 1.670***
(15.86) (10.67) (17.73)

-0.031 0.032 -0.042
(-0.56) (0.40) (-0.55)
State-Owned Bank Dummy 0.001 0.009* 0.050** 0.006 0.005 0.022 0.000 0.013*** 0.039
(0.58) (1.68) (2.08) (1.36) (0.38) (0.42) (0.02) (3.20) (1.52)
Foreign-Owned Bank Dummy 0.002 0.011* -0.092*** 0.009** 0.036*** -0.064 -0.005* -0.005 -0.085**
(1.14) (1.75) (-3.30) (2.52) (3.41) (-1.52) (-1.88) (-0.86) (-2.24)
Subsidiary Bank Dummy 0.001 0.011** -0.059*** 0.003 0.030*** -0.121*** 0.001 0.002 0.022
(0.65) (2.52) (-3.14) (1.18) (3.87) (-4.05) (0.51) (0.41) (0.89)
Young Bank Dummy 0.005** 0.008 0.004 0.002 -0.012 -0.048 0.006** 0.001 0.016
(2.22) (1.05) (0.13) (0.38) (-0.98) (-0.97) (2.25) (0.23) (0.38)
Middle-Age Bank Dummy 0.005** -0.003 -0.066** 0.008** -0.020** -0.134*** 0.001 0.011* 0.013
(2.53) (-0.52) (-2.48) (2.52) (-2.12) (-3.59) (0.53) (1.95) (0.36)
Constant -0.036* 0.000 0.000 -0.026 0.000 0.000 0.000 0.000 0.000
(-1.86) (.) (.) (-1.05) (.) (.) (.) (.) (.)

Observations 1,506 1,506 1,506 601 601 601 905 905 905
R-squared 0.151 0.469 0.409 0.191 0.542 0.461 0.185 0.581 0.473

32
Table 4 Regression Estimates of Stability Model Using Logarithm of Z-Score and its Components as the Proxy
Variables Log Zscore
Log
SD(ROAA)
Log
Zscore P1
Log
Zscore P2
Log Zscore
Log
SD(ROAA)
Log
Zscore P1
Log
Zscore P2
Log Zscore
Log
SD(ROAA)
Log
Zscore P1
Log
Zscore P2

Islamic Bank Dummy 0.064 0.039 0.171 0.011 0.786 -0.766 0.460 0.703 -0.170 0.184 -0.027 -0.180
(0.37) (0.23) (0.94) (0.06) (1.34) (-0.98) (0.79) (0.92) (-0.90) (0.99) (-0.14) (-0.95)
Islamic Window Dummy 0.012 -0.065 0.154 -0.018 0.214 0.306 0.202 0.023 -0.078 -0.046 0.041 -0.095
(0.07) (-0.40) (0.79) (-0.11) (0.47) (0.58) (0.39) (0.04) (-0.46) (-0.29) (0.20) (-0.59)
Log of Mean of Total Asset 0.014 -0.126** 0.177*** 0.025 -0.003 -0.324 0.441* 0.116 0.048 -0.130** 0.085 0.030
(0.28) (-2.60) (3.61) (0.41) (-0.01) (-1.67) (1.95) (0.41) (0.67) (-2.18) (1.25) (0.41)
Mean of Total Assets Growth -0.329 0.408 0.366 -0.244 0.009 -1.384 -0.376 1.428 -0.195 0.549 0.439 -0.281
(-0.92) (1.16) (1.01) (-0.64) (0.01) (-1.44) (-0.45) (0.96) (-0.49) (1.60) (1.10) (-0.75)
Mean of Liquid Asset to Deposit
& Short-Term Funding Ratio 0.641* -0.085 0.420* 0.802* 0.417 -0.032 0.986** 0.854 0.989 -0.705 0.278 0.929
(1.73) (-0.24) (1.73) (1.96) (1.18) (-0.07) (2.41) (1.40) (1.31) (-1.23) (0.56) (1.29)
Mean of Net Com. Trad. To Total
Operating Income Ratio -1.355** 1.242 -0.771 -2.122* -1.087 2.967 -0.993 -3.969 -2.446** 1.258 -1.114 -2.254**
(-2.00) (1.60) (-1.13) (-1.93) (-0.96) (1.61) (-0.73) (-1.35) (-2.61) (1.38) (-1.25) (-2.51)
Mean of Inefficiency -0.836*** 0.559** -0.557** -0.982*** 0.448 -0.460 0.031 0.163 -1.419*** 1.072*** -0.917*** -1.433***
(-3.12) (2.37) (-2.34) (-3.30) (0.99) (-1.05) (0.07) (0.29) (-4.09) (3.71) (-2.73) (-4.31)
State-Owned Bank Dummy -0.042 0.084 -0.160 -0.037 -0.186 0.214 -0.288 -0.182
(-0.23) (0.47) (-0.86) (-0.20) (-0.96) (1.09) (-1.33) (-0.96)
Foreign-Owned Bank Dummy -0.643*** 0.683*** -1.124*** -0.521** -0.699* 0.697** -1.054* -0.339 -0.667* 0.746*** -1.287*** -0.630*
(-2.88) (4.24) (-3.81) (-2.37) (-1.89) (2.50) (-1.92) (-0.83) (-1.92) (2.78) (-2.94) (-1.87)
Subsidiary Bank Dummy -0.113 0.235 0.295** -0.143 0.559* -0.098 0.645** 0.538 -0.361 0.379* 0.051 -0.408
(-0.55) (1.34) (2.07) (-0.66) (1.98) (-0.35) (2.20) (1.53) (-1.35) (1.78) (0.26) (-1.41)
Constant 3.942*** -4.517*** -1.400 4.259*** 1.799 0.003 -6.701* 0.475 4.426*** -5.120*** 0.122 4.533***
(4.00) (-5.14) (-1.20) (4.08) (0.50) (0.00) (-2.00) (0.12) (3.06) (-4.34) (0.10) (3.17)
Country Dummies? Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Number of Observations 203 205 194 204 61 63 57 62 142 142 137 142
R-squared 0.375 0.443 0.347 0.374 0.633 0.577 0.571 0.503 0.382 0.504 0.349 0.403
adj. R-sq 0.270 0.350 0.236 0.269 0.420 0.345 0.314 0.223 0.262 0.407 0.217 0.287
F-statistics . . . . . . . . 4.756 7.339 4.121 5.432
Acquiring banks are excluded from the sample, since the volatility on their assets returns can be due to the acquisition. Banks need to have at least five consecutive observations.
Zscore=(M_ROAA+M_ETA)/SDROAA, M_ROAA = Mean of ROAA over the sample period, M_ETA=Mean of ETA over the sample period, SDROAA= standard deviation of ROAA over the sample
period, Zscorep1=M_ROAA/SDROAA, Zscorep2=M_ETA/SDROAA, Robust t-statistics in parentheses, * significant at 10%, ** significant at 5%, *** significant at 1%.
33
Table 5 Regression Estimates of Insolvency Risk Model using Unreserved Impaired Loans to Equity as the proxy (Dependent Variable)
Variables Full Sample Small Banks Sample Large Bank Sample
Islamic Bank Dummy 0.028 0.031 0.024 0.034 0.043 -0.095 -0.099 -0.114 -0.041 -0.015 0.038 0.053 0.050 0.035 0.038
(0.48) (0.54) (0.41) (0.60) (0.77) (-0.81) (-0.84) (-0.91) (-0.33) (-0.12) (0.66) (0.84) (0.80) (0.54) (0.58)
Islamic Window Dummy -0.043 -0.060 -0.064 -0.055 -0.041 -0.038 -0.041 -0.048 -0.009 0.039 -0.110 -0.118 -0.118 -0.098 -0.076
(-0.54) (-0.70) (-0.75) (-0.67) (-0.51) (-0.26) (-0.27) (-0.32) (-0.06) (0.26) (-1.44) (-1.53) (-1.53) (-1.31) (-1.11)
Log of Total Asset 0.022 0.020 0.027 0.035 0.037 0.037 0.020 0.012 0.024 0.022 0.015 0.028
(1.01) (0.89) (1.29) (1.64) (0.74) (0.63) (0.33) (0.20) (0.93) (0.87) (0.56) (1.11)
Short-Term Funding Ratio

-0.047 -0.036 -0.077 -0.035 -0.021 -0.061 -0.003 -0.017 -0.082
(-0.82) (-0.62) (-1.32) (-0.44) (-0.25) (-0.67) (-0.03) (-0.17) (-1.10)
Inefficiency 0.137 0.126 0.183 0.132 0.216* 0.227*
(1.47) (1.32) (1.23) (0.97) (1.89) (1.89)
Loans Growth (%) -0.108*** -0.152*** -0.076**
(-3.36) (-2.71) (-2.06)
State-Owned Bank Dummy 0.076 0.077 0.095 0.087 0.106 -0.040 -0.031 -0.010 -0.064 -0.081 0.171 0.172 0.172 0.148 0.186*
(0.80) (0.81) (0.99) (0.95) (1.14) (-0.33) (-0.26) (-0.08) (-0.51) (-0.65) (1.61) (1.62) (1.61) (1.39) (1.73)
Foreign-Owned Bank Dummy -0.015 -0.010 -0.009 0.090 0.144 0.057 0.060 0.045 0.117 0.170 0.016 0.010 0.008 0.059 0.103
(-0.11) (-0.07) (-0.06) (0.62) (0.81) (0.39) (0.40) (0.29) (0.70) (0.68) (0.07) (0.04) (0.03) (0.24) (0.39)
Subsidiary Bank Dummy -0.057 -0.040 -0.037 -0.057 -0.052 -0.107 -0.103 -0.084 -0.051 -0.110 -0.017 -0.004 -0.007 0.002 0.025
(-0.83) (-0.55) (-0.50) (-0.79) (-0.70) (-1.00) (-0.95) (-0.74) (-0.43) (-0.90) (-0.24) (-0.05) (-0.09) (0.02) (0.29)
Young Bank Dummy -0.158** -0.142* -0.130* -0.073 0.021 -0.248* -0.223* -0.223 -0.143 0.026 -0.043 -0.030 -0.031 -0.028 0.033
(-2.13) (-1.90) (-1.70) (-0.96) (0.29) (-1.89) (-1.71) (-1.60) (-0.96) (0.18) (-0.86) (-0.56) (-0.57) (-0.50) (0.61)
Middle-Age Bank Dummy -0.072 -0.067 -0.051 -0.039 0.027 -0.067 -0.059 -0.033 -0.020 0.003 -0.025 -0.022 -0.022 -0.017 0.088
(-1.48) (-1.40) (-1.00) (-0.74) (0.46) (-0.86) (-0.78) (-0.39) (-0.23) (0.04) (-0.44) (-0.38) (-0.37) (-0.28) (1.31)
Constant 0.647*** 0.058 0.494* -0.092 0.111 0.620*** -0.103 0.311 0.000 0.531 0.449** 0.000 0.000 -0.136 0.000
(4.49) (0.20) (1.75) (-0.22) (0.30) (4.08) (-0.18) (0.50) (.) (0.64) (2.16) (.) (.) (-0.28) (.)
Year Dummies? Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country Dummies? Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Number of Observations 1,043 1,043 1,031 984 827 452 452 442 423 341 591 591 589 561 486
Number of Banks 264 264 262 253 241 142 142 139 135 120 161 161 160 155 152
R-sq. within group 0.185 0.187 0.184 0.187 0.202 0.173 0.176 0.178 0.187 0.258 0.227 0.229 0.229 0.223 0.189
R-sq. between group 0.210 0.207 0.214 0.237 0.249 0.280 0.279 0.273 0.183 0.217 0.281 0.281 0.281 0.301 0.330
R-sq. overall 0.193 0.191 0.192 0.225 0.245 0.183 0.186 0.181 0.187 0.231 0.314 0.311 0.312 0.330 0.347
Unreserved Impaired Loans = Impaired Loans Loan Loss Reserves. Robust z-statistics in parentheses, * significant at 10%, ** significant at 5%, *** significant at 1%.
34
Figure (2) Pay off to Equity holders and Depositors across different banks

(a) (b)

(c) (d)

(e) (f)

35
Table 6 - Correlation between return on average equity and Implicit Interest Expense Rate
across different banks

Observations at 25
Percentile
Observations between
25 & 75 Percentiles
Observations above 75
Percentile
Small Islamic Banks
-0.042
(0.77)
-0.025
(0.80)
0.516***
(0.00)
Small Conventional Banks
-0.076
(0.26)
0.017
(0.72)
-0.072
(0.28)
Small ISW
0.001
(0.99)
0.219*
(0.07)
-0.123
(0.49)
Large Islamic Banks
-0.457***
(0.00)
0.181*
(0.06)
0.264**
(0.05)
Large Conventional Banks
-0.120
(0.10)
-0.092*
(0.07)
0.040
(0.59)
Large ISW
-0.307***
(0.01)
0.008
(0.92)
0.063
(0.57)
Islamic Banks
-0.050
(0.61)
0.139**
(0.04)
0.378***
(0.00)
Conventional Banks
-0.102**
(0.04)
-0.050
(0.15)
-0.004
(0.94)
ISW
-0.219**
(0.02)
0.044
(0.51)
0.029
(0.75)
Significance level in parentheses, * significant at 10%, ** significant at 5%, *** significant at 1%
36
Annex 1 Description of Variables Used in the Analysis
Loans Risk Proxy Description
Problem Loans / Gross
Loans
Problem Loans (PL) increases when a bank classifies a specific loan or a part of loans
portfolio as the bad loans. It decreases when either a bank re-assesses a problem loan or
a part of the portfolio of loans as the good loans or when a bank writes off a loan or a
part of portfolio of loans.
Loan Loss Reserves / Gross
Loans
Loan Loss Reserves (LLR) is considered for the whole loans portfolio, and not only for
the Problems Loans. The managers assess the quality of the loans portfolio and
determine the required reserves. Then the current level of LLR will be adjusted to reach
to the required level. The adjustment will be reflected in the Loan Loss Provision
stipulated in the income statement. When a bank decides to write off a loan, the loan
amount would be deducted from the LLR.
Loan Loss Provisions /
Average Gross Loans
Loan Loss Provision (LLP) is the incurred cost by banks as a result of adjusting the
LLR or writing off a loan. Hence, despite of PL and LLR which are stock. LLP is flow
and is stipulated in the income statement. It is possible to have a negative LLP in one
period, when the required loan loss reserve is lower than the current reserve.
Insolvency Risk Proxy
Z-Score
(ROAA+ETA)/SD(ROAA), wherein ROAA stands for Returns on Average Assets and
ETA stands for Equity to Asset ratio. SD represents volatility of ROAA.
Unreserved Impaired Loans
to Equity Ratio
Unreserved impaired loans is obtained by deducting loan loss reserves from the
impaired loans.
Size Logarithm of Total Assets controls for size
Financial Ratios
Capital Equity to Asset Ratio is the proxy
Inefficiency
Using the stochastic frontier approach, the cost inefficiency is estimated for each bank.
The model and methodology is briefly presented in Annex 2.
Liquidity Represented by Liquid Asset to Deposit & Short-Term Funding Ratio
Asset Growth Calculated based on the annual growth of total assets
Growth of Gross Loans Calculated based on the annual growth of gross loans
Non-Interest Income Represented by Net Comm. & Trading Income to Total Operating Income Ratio
ROAA Stands for Returns on Average Assets
Ownership Structure
State-Owned Bank Dummy Takes one, in case the bank is state-owned, and zero otherwise.
Foreign-Owned Bank
Dummy
Takes one, in case the bank is Foreign-owned, and zero otherwise.
Subsidiary Dummy Takes one, in case the bank is subsidiary, and zero otherwise.
Banks Age Dummy
Young Bank Dummy Takes one, in case the bank operates for at most three years, and zero otherwise.
Middle-Aged Bank Dummy Takes one, in case the bank operates between three to seven years, and zero otherwise.
Year Dummies Seven dummy variables are supposed to control for the years effects.
Country Dummies Cross country variations are controlled by twenty one dummy variables.
37
Annex 2 Estimating Cost Inefficiency
To estimate the cost inefficiency, we adopt the translog cost function which is the same
as the model applied by Altunbas et al. (2007). Two outputs (loans and other earning
assets) and three input prices (wage. interest expense rate and other operating expenses
price) are considered in the model. The empirical specification which is used to estimate
the cost inefficiency can be expressed as follows:
2 3
2
,
, , 1 1
, ,
1 1
2 2 3 3 2 3
, ,
, , , , , ,
, , , , , ,
1 1 1 1 1 1
1
ln ( ) ln ( ) ln
2
1
ln ln ln ln ln ln
2
i t
k i t j k
j k j i t
j k
i t i t
k i t m i t m i t jl km
jm j i t l i t j i t
j l k m j m
TC C t t t
V U
Q
t P
Q Q Q
P P P

= =
= = = = = =
= + + + + + +
(
+ + + + +
(

Wherein
,
ln
i t
TC is the natural logarithm of total cost of the bank i at the time of t;
, ,
ln
j i t
Q
is the natural logarithm of output vector of the bank i at the time of t. Loans and
Other Earning Assets are considered as the output;
, ,
ln
k i t P
is the natural logarithm of input prices vector of the bank i at the time of t, and
consists of wage, interest expense rate and other operating expenses price; wage is
obtained by dividing personnel expenses on fixed assets, as a proxy for the number of
employees. Interest expense rate is the interest expense divided by deposits, short term
funding and other funding. Other operating expenses price is calculated as the ratio of
other operating expenses on total assets.
, i t
V is the random variable which are assumed to be normally distributed with the
expected value of zero.
2
(0, )
v
N
.
, i t
U is assumed to be equal to exp( ( ))
i
t T
U
as proposed by Battese and Coelli (1992),
wherein
i U
is the non-negative random variable representing the cost inefficiency. It is
assumed to have a normal distribution of
2
( , )
u
N

truncated at zero.

is a parameter to
be estimated.

38
Annex 3 Cross Country and Banks Types Sample Specification
Table A Cross-Country Sample Specification
The table presents the number of observations for Islamic banks, Conventional banks with
Islamic window or branch and Conventional banks across 22 countries, for the years 2001-2008.
Country Islamic bank
Conventional Bank with
Islamic Window
Conventional Bank Total
Algeria 8 10 52 70
Bahrain 60 52 8 120
Bangladesh 37 55 163 255
Egypt 16 31 134 181
Gambia 6 0 25 31
Indonesia 12 51 324 387
Iran 67 0 0 67
Jordan 15 0 66 81
Kuwait 14 8 40 62
Lebanon 7 16 217 240
Malaysia 36 69 115 220
Mauritania 8 16 23 47
Pakistan 30 75 74 179
Qatar 16 9 38 63
Saudi Arabia 17 55 0 72
Senegal 4 0 59 63
Syria 2 0 32 34
Sudan 87 0 0 87
Tunisia 8 0 82 90
Turkey 13 0 96 109
UAE 28 20 107 155
Yemen 26 0 35 61
Total 517 467 1690 2674

Table B Types of Banks Data Specification
This table presents the number of observations in terms of banks ownership and age
(experience). The information is mainly obtained from banks web-sites.
Islamic bank
Conventional Bank with
Islamic Window
Conventional Bank Total
State-owned Banks 64 51 240 355
Foreign-owned Banks 88 35 98 221
Subsidiaries 74 75 437 586
Private-owned Banks 291 306 915 1512
Total 517 467 1690 2674
Young Banks 104 30 106 240
Middle Aged Banks 76 36 136 248
Matured Banks 337 401 1448 2186
Total 517 467 1690 2674
State-owned banks: state ownership > 50%. Foreign-owned banks: foreign ownership > 50%. Subsidiaries: parent
ownership = 100%. Private-owned banks: domestic private ownership > 50%. Young banks: operating less than 3
years. Middle aged banks: operating between 3 to 7 years. Matured banks: operating more than 7 years.
39
Annex 4 Correlation Matrix
a b c d e f g h i j k l m n o p q r s
(a) Problem Loans on Gross Loans 1
(b) Loan Loss Reserves on Gross
Loans
0.74 1
(c) Loan Loss Provisions on Average
Gross Loans
0.23 0.30 1
(d) Unreserved Impaired Loans to
Equity
0.57 0.37 0.17 1
(e) Islamic Bank Dummy -0.12 -0.18 0.02 -0.10 1
(f) Islamic Window Dummy -0.10 -0.07 -0.06 -0.03 -0.22 1
(g) Log of Asset -0.18 -0.19 -0.12 -0.12 -0.06 0.23 1
(h) Asset Growth -0.06 -0.05 -0.02 -0.04 0.05 -0.03 -0.03 1
(i) Equity Asset Ratio -0.06 0.00 -0.02 -0.32 0.09 -0.07 -0.30 0.03 1
(j) Inefficiency 0.22 0.22 0.15 0.20 -0.01 -0.09 0.11 -0.04 -0.25 1
(k) Liquid Assets to Deposit & Short
Term Funding
0.09 0.14 -0.02 -0.10 0.02 -0.14 -0.24 0.00 0.35 0.00 1
(l) Growth of Gross Loans -0.26 -0.22 0.03 -0.19 0.15 -0.04 -0.04 0.56 0.06 -0.10 -0.01 1
(m) ROAA -0.33 -0.23 -0.22 -0.35 0.08 0.06 0.08 0.02 0.31 -0.24 0.07 0.11 1
(n) Net Comm. & Trading Rev. to
Total Operating Income
-0.02 0.12 0.19 0.06 0.03 -0.04 -0.14 0.00 -0.04 0.00 0.03 0.01 -0.09 1
(o) State-Owned Bank Dummy 0.11 0.06 0.08 0.06 -0.01 -0.04 0.14 -0.03 -0.09 -0.02 -0.04 -0.03 -0.02 0.01 1
(p) Foreign-Owned Bank Dummy 0.12 0.15 0.04 0.00 0.14 -0.01 -0.08 0.06 0.05 0.09 0.01 -0.01 -0.06 0.08 -0.09 1
(q) Subsidiary Dummy -0.05 0.04 0.00 -0.04 -0.09 -0.07 -0.16 0.00 0.11 -0.06 0.09 -0.02 0.01 0.10 -0.21 -0.16 1
(r) Young Bank Dummy -0.10 -0.08 0.04 -0.07 0.18 -0.04 -0.17 0.13 0.20 -0.03 0.09 0.33 0.00 0.02 -0.10 0.03 0.06 1
(s) Middle-Age Bank Dummy -0.03 -0.07 0.07 -0.03 0.09 -0.02 -0.15 0.01 0.01 -0.10 -0.03 0.08 0.00 0.09 -0.05 0.00 0.03 -0.10 1
40
Annex 5 - Regression Estimates of Loan Risk Model Using Loan Loss Reserves on Gross Loans (LLRGL) as the Proxy
(SUR Simultaneous Approach)
Full Sample Small Banks Large Banks
Variables LLRGL Equity to Asset Ratio Inefficiency LLRGL Equity to Asset Ratio Inefficiency LLRGL Equity to Asset Ratio Inefficiency
Islamic Bank Dummy -0.030*** 0.002 0.039 -0.062*** 0.010 0.026 -0.013*** 0.004 0.047*
(-5.63) (0.29) (1.60) (-5.06) (0.88) (0.50) (-2.59) (0.96) (1.80)
Islamic Window Dummy -0.004 -0.015*** -0.072*** -0.027** 0.006 0.021 0.001 -0.014*** -0.083***
(-0.82) (-3.55) (-3.68) (-2.38) (0.57) (0.45) (0.30) (-4.18) (-4.21)
Log of Total Asset -0.002* -0.019*** -0.002 -0.007 -0.046*** -0.001 -0.002 -0.007*** 0.004
(-1.84) (-15.90) (-0.28) (-1.51) (-11.42) (-0.03) (-1.22) (-5.11) (0.46)
LLRGL 0.326*** 2.071*** 0.342*** 1.966*** 0.115*** 2.292***
(12.98) (18.25) (8.64) (11.55) (4.04) (14.19)
Equity to Asset Ratio 0.232*** -1.652*** 0.261*** -1.746*** 0.054 -0.802***
(8.89) (-14.72) (6.01) (-10.40) (1.52) (-4.44)
Inefficiency 0.098*** -0.079*** 0.113*** -0.082*** 0.086*** -0.031***
(17.50) (-14.69) (11.38) (-8.60) (13.60) (-5.59)
Loans Growth (%) -0.014*** -0.014** -0.012***
(-4.25) (-2.46) (-2.90)
Term Funding Ratio 0.019*** 0.021** 0.010*

(3.78) (2.41) (1.74)
ROAA 1.476*** 1.810*** 1.400***
(16.17) (11.26) (15.37)
Net Com. Trad. To Total Operating
Income Ratio

-0.038 -0.018 -0.026
(-0.67) (-0.21) (-0.36)
State-Owned Bank Dummy 0.005 0.007 0.029 0.009 0.003 0.015 0.010** 0.012*** -0.006
(0.91) (1.38) (1.17) (0.62) (0.21) (0.25) (2.06) (3.01) (-0.24)
Foreign-Owned Bank Dummy 0.048*** -0.016*** -0.142*** 0.060*** -0.007 -0.091* 0.031*** -0.013** -0.155***
(7.66) (-2.69) (-4.91) (5.44) (-0.67) (-1.91) (4.32) (-2.12) (-4.30)
Subsidiary Bank Dummy -0.003 0.017*** -0.031 -0.001 0.033*** -0.063* 0.003 0.003 0.006
(-0.78) (4.16) (-1.62) (-0.17) (4.57) (-1.89) (0.67) (0.71) (0.25)
Young Bank Dummy 0.005 0.014** 0.036 -0.026* 0.020 0.033 0.021*** -0.000 0.019
(0.67) (2.04) (1.08) (-1.79) (1.51) (0.56) (2.66) (-0.01) (0.46)
Middle-Age Bank Dummy -0.005 0.010* 0.011 0.001 0.012 -0.062 -0.003 0.005 0.051
(-0.84) (1.67) (0.37) (0.13) (1.16) (-1.37) (-0.44) (0.90) (1.40)
Constant 0.000 0.462*** 0.000 0.003 0.000 1.287*** -0.042 0.000 1.622***
(.) (8.54) (.) (0.04) (.) (4.09) (-0.83) (.) (6.51)
Number of Observations 1,402 1,402 1,402 518 518 518 884 884 884
R-squared 0.335 0.490 0.420 0.437 0.589 0.495 0.322 0.566 0.471
41
Annex 6
Table 6-1 Regression Estimates of Loan Risk Model Using Problem Loans on Gross Loans (PLGL) as the Proxy (3SLS Approach)
Variables PLGL Equity to Asset Ratio inefficiency PLGL Equity to Asset Ratio inefficiency PLGL Equity to Asset Ratio inefficiency
Islamic Bank Dummy -0.028** -0.052*** 0.085** -0.098* -0.290*** 0.152 0.013 0.004 -0.016
(-2.29) (-3.92) (2.21) (-1.71) (-3.86) (1.35) (1.13) (0.73) (-0.42)
Islamic Window Dummy -0.010 0.022* -0.043 -0.001 0.081 -0.057 -0.010 -0.003 -0.052
(-0.38) (1.82) (-1.43) (-0.01) (1.63) (-0.92) (-0.41) (-0.63) (-1.49)
Log of Total Asset -0.022*** -0.039*** 0.056*** -0.062 -0.159*** 0.046 -0.006 -0.008*** 0.023*
(-6.30) (-12.94) (3.82) (-0.95) (-5.57) (0.78) (-1.64) (-5.06) (1.88)
PLGL -1.292*** 2.670*** -4.193*** 2.536*** -0.345** 2.533**
(-7.24) (4.63) (-5.37) (2.68) (-2.52) (2.48)
Equity to Asset Ratio -0.706** 1.101** -1.112 -0.328 -0.828*** 2.530***
(-2.33) (2.37) (-0.60) (-0.42) (-6.23) (2.71)
Inefficiency 0.154 0.569*** -0.115 1.684*** 0.130 0.112***
(0.69) (8.58) (-0.16) (3.46) (0.64) (5.90)
Loans Growth (%) -0.013 -0.037 -0.018**
(-1.01) (-0.78) (-2.04)
Term Funding Ratio 0.039 0.047 0.009

(0.91) (0.50) (0.17)
ROAA 1.061*** 3.955** 0.970***
(3.57) (2.03) (5.41)
Income Ratio

-0.034 -0.056 -0.008
(-1.19) (-1.25) (-0.11)
State-Owned Bank Dummy 0.016 0.003 -0.013 0.057 0.102* -0.056 0.017** 0.010** -0.039
(1.01) (0.22) (-0.35) (1.03) (1.75) (-0.65) (2.18) (2.01) (-1.02)
Foreign-Owned Bank Dummy 0.039** 0.077*** -0.141*** 0.079*** 0.329*** -0.191* -0.016 -0.003 -0.015
(2.03) (4.79) (-3.24) (3.47) (4.28) (-1.83) (-0.96) (-0.47) (-0.29)
Subsidiary Bank Dummy 0.028 0.082*** -0.132*** 0.038 0.445*** -0.224*** 0.002 0.005 -0.019
(1.14) (6.99) (-4.72) (0.56) (4.22) (-3.20) (0.16) (1.07) (-0.62)
Young Bank Dummy -0.023 -0.066*** 0.129** -0.049 -0.260*** 0.148 -0.023 -0.016* 0.163***
(-0.78) (-3.25) (2.39) (-1.60) (-3.17) (1.33) (-0.73) (-1.76) (2.68)
Middle-Age Bank Dummy 0.011 0.040*** -0.053 0.009 0.250*** -0.122** -0.016 -0.007 0.081
(0.65) (2.59) (-1.29) (0.15) (2.98) (-2.00) (-1.22) (-0.88) (1.52)
Constant 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(.) (.) (.) (.) (.) (.) (.) (.) (.)
Year Dummies ? Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country Dummies ? Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 1,230 1,230 1,230 451 451 451 779 779 779
42
Annex 6
Table 6-2 Regression Estimates of Loan Risk Model Using Loan Loss Reserves on Gross Loans (LLRGL) as the Proxy (3SLS Approach)
Variables LLRGL Equity to Asset Ratio Inefficiency LLRGL Equity to Asset Ratio inefficiency LLRGL Equity to Asset Ratio Inefficiency
Islamic Bank Dummy -0.022*** -0.412** 0.056* -0.079** 0.021 0.034 -0.008 -0.006 0.048
(-2.88) (-2.28) (1.82) (-2.42) (0.33) (0.46) (-1.18) (-1.07) (1.25)
Islamic Window Dummy 0.016 0.407** -0.051** -0.023 0.012 0.020 -0.007 -0.002 -0.027
(1.10) (2.06) (-2.27) (-1.40) (0.28) (0.36) (-0.20) (-0.51) (-0.84)
Log of Total Asset -0.014*** -0.328*** 0.037*** -0.038** 0.005 0.014 -0.005 -0.010*** 0.034**
(-6.16) (-2.66) (3.87) (-2.43) (0.16) (0.46) (-1.52) (-5.55) (2.34)
LLRGL -19.441*** 2.627*** 1.284 2.076*** -0.886*** 5.490***
(-2.63) (5.50) (1.54) (3.14) (-3.20) (3.75)
Equity to Asset Ratio -0.005 -0.088 -0.629 -1.515*** -0.408*** 2.176***
(-0.02) (-0.33) (-0.99) (-4.37) (-4.10) (2.82)
Inefficiency 0.343** 8.040** -0.068 -0.621** 0.051 0.170***
(2.52) (2.39) (-0.27) (-2.55) (0.14) (4.55)
Loans Growth (%) -0.002 -0.009 -0.004
(-0.64) (-1.09) (-0.79)
Term Funding Ratio 0.005

0.071* 0.022

(0.22) (1.88) (0.31)
ROAA 4.421 0.157 0.892***
(1.45) (0.47) (5.16)
Income Ratio

0.007 -0.023 -0.021
(0.77) (-0.72) (-0.32)
State-Owned Bank Dummy 0.000 -0.037 0.003 0.022 0.006 0.008 0.017*** 0.024*** -0.093**
(0.02) (-0.39) (0.11) (1.02) (0.12) (0.12) (3.06) (3.88) (-2.08)
Foreign-Owned Bank Dummy 0.062*** 1.281** -0.168*** 0.081*** -0.063 -0.104 0.022 0.024** -0.176***
(6.14) (2.50) (-4.53) (3.98) (-0.93) (-1.50) (0.80) (2.29) (-3.14)
Subsidiary Bank Dummy 0.025*** 0.626** -0.073*** 0.014 -0.046 -0.077* 0.005 0.006 -0.024
(2.65) (2.42) (-3.37) (0.86) (-0.97) (-1.94) (0.94) (1.15) (-0.68)
Young Bank Dummy -0.008 -0.185 0.027 -0.036* 0.024 0.039 0.020 0.007 -0.049
(-0.64) (-1.31) (0.73) (-1.73) (0.43) (0.57) (0.65) (0.76) (-0.74)
Middle-Age Bank Dummy -0.004 -0.051 0.011 -0.009 -0.038 -0.062 -0.004 -0.007 0.055
(-0.50) (-0.48) (0.33) (-0.38) (-0.91) (-1.29) (-0.25) (-0.90) (1.07)
Constant 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(.) (.) (.) (.) (.) (.) (.) (.) (.)
Observations 1,402 1,402 1,402 518 518 518 884 884 884
43
Annex 6
Table 6-3 Regression Estimates of Loan Risk Model Using Loans Loss Provision on Average Gross Loans (LLPAGL) as the Proxy
(3SLS Approach)
Variables LLPAGL Equity to Asset Ratio Inefficiency LLPAGL Equity to Asset Ratio Inefficiency LLPAGL Equity to Asset Ratio Inefficiency
Islamic Bank Dummy -0.150 -0.010 0.022 0.236 -0.045*** -0.116 0.012 0.003 -0.162
(-0.14) (-0.91) (0.63) (1.18) (-3.03) (-1.41) (0.49) (0.39) (-0.96)
Islamic Window Dummy -0.533 0.019 -0.026 0.173 -0.021 -0.086* -0.030 -0.008* 0.133
(-0.14) (1.61) (-0.82) (1.19) (-1.36) (-1.75) (-0.41) (-1.85) (0.80)
Log of Total Asset 0.001 -0.033*** 0.073*** 0.104 -0.051*** -0.045 0.002 -0.006*** 0.047
(0.02) (-9.67) (5.83) (1.06) (-6.81) (-0.94) (0.24) (-3.18) (1.07)
LLPAGL -0.595 20.171*** -0.894 0.488 -1.089 46.249
(-0.59) (6.00) (-1.51) (0.06) (-0.96) (1.57)
Equity to Asset Ratio -7.572 2.880*** 3.685 -1.582 -0.420 12.736
(-0.15) (5.56) (0.99) (-1.54) (-1.04) (1.54)
Inefficiency -4.955 0.381*** 2.062 -0.161 -0.259 0.040
(-0.14) (4.86) (1.18) (-1.46) (-0.34) (1.30)
Loans Growth (%) -0.047 0.053 -0.003
(-0.04) (0.95) (-0.25)
Term Funding Ratio 0.939 -0.079 0.060
(0.17) (-0.36) (0.37)
ROAA 2.167*** 1.214*** 1.040**
(5.08) (2.67) (2.19)

-0.491*** 0.011 -0.264
(-3.91) (0.04) (-0.66)
State-Owned Bank Dummy 0.209 -0.010 -0.016 -0.069 0.017 0.037 0.007 0.012*** -0.160
(0.14) (-0.83) (-0.44) (-1.02) (1.04) (0.39) (0.57) (2.62) (-1.01)
Foreign-Owned Bank Dummy -0.405 0.063*** -0.164*** 0.056 0.038** -0.031 -0.030 -0.012 0.399
(-0.13) (3.92) (-3.90) (1.12) (2.13) (-0.27) (-0.50) (-1.06) (1.12)
Subsidiary Bank Dummy -0.362 0.049*** -0.131*** 0.205 0.018 -0.102* 0.004 0.002 -0.053
(-0.14) (4.38) (-4.52) (1.18) (0.86) (-1.68) (0.38) (0.45) (-0.47)
Young Bank Dummy 0.162 0.007 -0.096* 0.060 -0.014 -0.049 0.019 0.009 -0.308
(0.10) (0.43) (-1.90) (0.99) (-0.96) (-0.85) (0.51) (0.87) (-1.08)
Middle-Age Bank Dummy -0.259 0.025* -0.098** 0.251 -0.022 -0.125*** 0.003 0.012* -0.175
(-0.15) (1.86) (-2.47) (1.20) (-1.32) (-3.02) (0.29) (1.84) (-0.92)
Constant 0.000 -0.149 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(.) (-0.87) (.) (.) (.) (.) (.) (.) (.)
Number of Observations 1,506 1,506 1,506 601 601 601 905 905 905
44
Annex 7
Table 7-1 Regression Estimates of Loan Risk Model using Problem Loans on Gross Loans (PLGL) as the proxy
(Dependent Variable: PLGL)
Variables Full Sample Small Banks Sample Large Banks Sample
Islamic Bank Dummy -0.030*** -0.030*** -0.031*** -0.032*** -0.024** -0.071*** -0.071*** -0.071*** -0.075*** -0.064*** -0.003 -0.003 -0.002 -0.002 0.006
(-2.68) (-2.59) (-2.64) (-2.63) (-2.01) (-3.53) (-3.53) (-3.43) (-3.55) (-2.90) (-0.32) (-0.24) (-0.17) (-0.15) (0.55)
Islamic Window Dummy -0.021 -0.022* -0.020 -0.024* -0.026** -0.022 -0.023 -0.016 -0.023 -0.029 -0.018* -0.018* -0.015 -0.015 -0.015
(-1.58) (-1.67) (-1.49) (-1.75) (-1.96) (-0.81) (-0.85) (-0.57) (-0.82) (-1.02) (-1.81) (-1.84) (-1.56) (-1.58) (-1.48)
Log of Total Asset -0.012*** -0.012*** -0.013*** -0.013*** -0.009** -0.030*** -0.033*** -0.034*** -0.031*** -0.027** -0.004 -0.006 -0.006 -0.006 -0.002
(-3.27) (-3.15) (-3.23) (-3.22) (-2.14) (-2.98) (-2.91) (-3.01) (-2.70) (-2.19) (-1.02) (-1.64) (-1.51) (-1.48) (-0.58)
Equity to Asset Ratio -0.040 -0.024 -0.137* -0.063 -0.055 -0.010 -0.170 -0.044 -0.202*** -0.215*** -0.214*** -0.190**
(-0.48) (-0.27) (-1.72) (-0.75) (-0.45) (-0.08) (-1.31) (-0.31) (-2.80) (-2.90) (-2.90) (-2.53)
Inefficiency 0.038** 0.029* 0.033* 0.070** 0.054* 0.060* 0.041*** 0.041*** 0.035***
(2.08) (1.65) (1.82) (2.44) (1.84) (1.85) (3.38) (3.33) (2.72)

-0.004 -0.016 -0.006 -0.027 0.001 -0.001
(-0.38) (-1.10) (-0.28) (-1.10) (0.08) (-0.12)
Loans Growth (%) -0.036*** -0.036*** -0.029***
(-6.30) (-4.52) (-3.21)
State-Owned Bank
Dummy 0.031** 0.027* 0.016 0.020 0.021 0.017 0.018 -0.007 0.005 0.012 0.018 0.016 0.018 0.018 0.017
(2.02) (1.78) (1.11) (1.43) (1.60) (0.65) (0.64) (-0.28) (0.21) (0.51) (1.47) (1.33) (1.57) (1.59) (1.46)
Foreign-Owned Bank
Dummy 0.022 0.020 0.021 0.022 0.009 0.048* 0.048* 0.056* 0.060* 0.045 -0.001 -0.003 -0.009 -0.009 -0.025
(1.09) (0.97) (0.99) (0.95) (0.47) (1.78) (1.72) (1.82) (1.86) (1.35) (-0.05) (-0.12) (-0.33) (-0.34) (-1.14)
Subsidiary Bank Dummy -0.005 -0.003 -0.003 0.001 0.001 0.013 0.015 0.023 0.029 0.018 -0.012 -0.011 -0.011 -0.011 -0.003
(-0.39) (-0.28) (-0.24) (0.11) (0.08) (0.70) (0.79) (1.16) (1.40) (0.86) (-1.18) (-1.11) (-1.10) (-1.10) (-0.34)
Young Bank Dummy -0.056*** -0.057*** -0.056*** -0.058*** -0.039*** -0.081*** -0.082*** -0.085*** -0.084*** -0.059*** -0.017* -0.017* -0.014* -0.014* -0.007
(-5.47) (-5.77) (-5.64) (-5.77) (-3.37) (-4.91) (-5.26) (-5.30) (-5.32) (-3.38) (-1.96) (-1.91) (-1.65) (-1.66) (-0.86)
Middle-Age Bank Dummy -0.004 -0.006 -0.005 -0.006 -0.004 0.001 -0.001 0.001 -0.000 -0.005 -0.017** -0.018** -0.016* -0.016* -0.005
(-0.38) (-0.63) (-0.51) (-0.59) (-0.43) (0.05) (-0.09) (0.04) (-0.02) (-0.35) (-2.16) (-2.19) (-1.93) (-1.90) (-0.58)
Constant 0.209*** 0.217*** 0.217*** 0.191*** 0.135* 0.452*** 0.495*** 0.351*** 0.314** 0.325 0.109** 0.165*** 0.000 0.000 0.035
(3.76) (3.55) (4.28) (3.38) (1.74) (3.27) (3.12) (2.92) (2.25) (1.59) (2.00) (2.69) (.) (.) (0.56)
Year Dummies ? Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Number of Observations 1,756 1,748 1,673 1,669 1,419 777 769 733 729 593 979 979 940 940 826
Number of Banks 324 323 312 312 301 180 179 173 173 159 200 200 194 194 190
R-Sq: Within Group 0.155 0.152 0.162 0.189 0.222 0.113 0.104 0.120 0.151 0.175 0.239 0.253 0.251 0.251 0.278
R-Sq: Between Group 0.326 0.324 0.322 0.290 0.305 0.261 0.255 0.297 0.246 0.268 0.461 0.465 0.460 0.459 0.473
R-Sq: Overall 0.257 0.255 0.257 0.254 0.293 0.215 0.206 0.234 0.227 0.282 0.427 0.434 0.422 0.422 0.448
Robust z-statistics in parentheses, * significant at 10%, ** significant at 5%, *** significant at 1%
45
Annex 7
Table 7-2 Regression Estimates of Loan Risk Model Using Loan Loss Reserve on Gross Loans (LLRGL) as the Proxy
(Dependent Variable: LLRGL)
Islamic Bank Dummy -0.033*** -0.032*** -0.033*** -0.032*** -0.029*** -0.074*** -0.071*** -0.063*** -0.062*** -0.060*** -0.011 -0.010 -0.009 -0.009 -0.009
(-4.48) (-4.23) (-4.21) (-4.08) (-3.88) (-5.95) (-5.44) (-4.76) (-4.66) (-4.41) (-1.55) (-1.43) (-1.23) (-1.23) (-1.23)
Islamic Window Dummy -0.008 -0.008 -0.013* -0.013 -0.012 -0.020 -0.020 -0.021 -0.021 -0.025 -0.006 -0.006 -0.003 -0.003 -0.001
(-0.88) (-0.91) (-1.67) (-1.63) (-1.45) (-1.14) (-1.17) (-1.34) (-1.27) (-1.31) (-0.92) (-0.89) (-0.56) (-0.45) (-0.22)
Log of Total Asset -0.013*** -0.014*** -0.010*** -0.009*** -0.008*** -0.024*** -0.028*** -0.024*** -0.022*** -0.019** -0.006** -0.008*** -0.006** -0.006** -0.004
(-4.12) (-4.57) (-3.39) (-3.09) (-2.63) (-3.47) (-3.51) (-2.85) (-2.63) (-2.25) (-2.45) (-2.98) (-2.51) (-2.35) (-1.50)
Equity to Asset Ratio -0.044 -0.057 -0.075 -0.036 -0.083 -0.055 -0.064 -0.066 -0.125* -0.149** -0.164** -0.065
(-0.83) (-1.13) (-1.39) (-0.75) (-1.33) (-0.78) (-0.83) (-0.91) (-1.74) (-2.00) (-2.18) (-1.45)
Inefficiency 0.039*** 0.037*** 0.038*** 0.054*** 0.054*** 0.055*** 0.039*** 0.035*** 0.033***
(3.94) (3.73) (3.52) (3.37) (3.34) (3.11) (4.60) (3.99) (3.33)

0.014** 0.015*** 0.010 0.015** 0.019*** 0.018**
(2.29) (2.67) (1.18) (2.08) (2.74) (2.45)
Loans Growth (%) -0.013*** -0.011** -0.007
(-3.16) (-2.56) (-1.17)
State-Owned Bank
Dummy 0.013* 0.015* 0.009 0.008 0.008 -0.002 0.005 -0.003 -0.005 0.001 0.011 0.011 0.009 0.008 0.007
(1.67) (1.82) (1.09) (0.98) (1.02) (-0.19) (0.45) (-0.27) (-0.38) (0.08) (1.23) (1.21) (1.11) (0.97) (0.84)
Foreign-Owned Bank
Dummy 0.034*** 0.034*** 0.036*** 0.038*** 0.037*** 0.039*** 0.043*** 0.042*** 0.043*** 0.042** 0.025 0.024 0.028 0.031 0.030
(3.10) (3.03) (2.93) (3.08) (2.87) (2.81) (2.86) (2.63) (2.67) (2.31) (1.50) (1.43) (1.47) (1.60) (1.46)
Subsidiary Bank Dummy 0.001 0.003 0.006 0.006 0.005 0.007 0.011 0.015 0.015 0.009 -0.001 -0.001 0.002 0.001 0.004
(0.18) (0.34) (0.73) (0.77) (0.60) (0.57) (0.86) (1.16) (1.17) (0.66) (-0.19) (-0.21) (0.25) (0.14) (0.53)
Young Bank Dummy -0.032*** -0.030*** -0.027*** -0.028*** -0.021*** -0.042*** -0.037*** -0.036*** -0.038*** -0.032*** -0.006 -0.005 -0.002 -0.002 0.007
(-4.70) (-4.23) (-4.21) (-4.32) (-2.82) (-4.10) (-3.57) (-3.56) (-3.66) (-2.79) (-0.88) (-0.78) (-0.25) (-0.32) (0.86)
Middle-Age Bank
Dummy -0.015*** -0.014*** -0.007 -0.008 -0.008 -0.008 -0.006 -0.000 -0.001 -0.003 -0.018*** -0.018*** -0.014*** -0.015*** -0.011*
(-2.84) (-2.61) (-1.37) (-1.51) (-1.38) (-1.02) (-0.77) (-0.03) (-0.11) (-0.33) (-3.65) (-3.57) (-2.60) (-2.63) (-1.96)
Constant 0.247*** 0.240*** 0.170*** 0.126** 0.133*** 0.336*** 0.378*** 0.328*** 0.000 0.214** 0.157*** 0.165*** 0.129*** 0.097** 0.085*
(5.28) (4.99) (3.26) (2.56) (2.65) (3.91) (3.60) (2.60) (.) (2.07) (4.51) (3.93) (2.85) (2.27) (1.95)
Number of Observations 2,196 2,184 1,891 1,885 1,586 987 975 835 829 660 1,209 1,209 1,056 1,056 926
Number of Banks 400 397 354 354 342 229 226 201 201 182 249 249 217 217 214
R-Sq: Within Group 0.119 0.121 0.145 0.148 0.182 0.065 0.075 0.111 0.104 0.117 0.165 0.180 0.217 0.236 0.252
R-Sq: Overall 0.295 0.294 0.262 0.271 0.324 0.338 0.340 0.302 0.315 0.393 0.310 0.307 0.292 0.292 0.325
46
Annex 7
Table 7-3 Regression Estimates of Loan Risk Model Using Loan Loss Provisions on Average Gross Loans (LLPAGL) as the Proxy
(Dependent Variable: LLPAGL)
Islamic Bank Dummy -0.001 -0.001 -0.001 -0.001 -0.002 -0.002 -0.002 -0.003 -0.003 -0.005 0.002 0.002 0.001 0.001 0.001
(-0.44) (-0.37) (-0.38) (-0.45) (-1.29) (-0.75) (-0.67) (-1.06) (-1.18) (-1.61) (1.16) (1.21) (0.76) (0.76) (0.87)
Islamic Window Dummy -0.002 -0.002 -0.002 -0.002 -0.001 -0.002 -0.002 -0.001 -0.001 0.001 -0.002 -0.002 -0.002 -0.002 -0.002
(-0.87) (-0.90) (-0.94) (-0.96) (-0.62) (-0.46) (-0.52) (-0.20) (-0.21) (0.14) (-1.44) (-1.47) (-1.28) (-1.31) (-1.36)
Log of Total Asset -0.000 -0.001 0.000 0.000 -0.000 0.000 -0.001 0.001 0.001 0.000 0.002*** 0.001** 0.001 0.001 0.001**
(-0.22) (-1.13) (0.16) (0.02) (-0.11) (0.02) (-0.75) (0.67) (0.51) (0.18) (3.06) (2.07) (1.32) (1.17) (2.14)
Equity to Asset Ratio -0.026** -0.023** -0.021* -0.029** -0.018 -0.011 -0.008 -0.020 -0.030 -0.045* -0.044* -0.037
(-2.41) (-2.19) (-1.94) (-2.12) (-1.60) (-0.92) (-0.67) (-1.17) (-1.07) (-1.70) (-1.66) (-1.40)
Inefficiency 0.011*** 0.011*** 0.010*** 0.011*** 0.011*** 0.010* 0.011*** 0.012*** 0.010***
(4.02) (4.13) (3.30) (2.68) (2.71) (1.94) (3.48) (3.65) (3.06)
Term Funding Ratio

-0.002 -0.002 -0.003 -0.003 -0.003 -0.002
(-1.47) (-1.33) (-1.03) (-1.09) (-1.40) (-0.93)
Loans Growth (%) -0.001 -0.001 -0.001
(-0.41) (-0.57) (-0.46)
State-Owned Bank Dummy 0.002 0.001 0.000 0.000 0.001 0.002 0.002 0.000 0.000 0.002 0.001 0.001 0.001 0.001 0.002
(0.67) (0.52) (0.13) (0.17) (0.58) (0.63) (0.49) (0.10) (0.16) (0.59) (0.67) (0.72) (0.50) (0.58) (0.90)
Foreign-Owned Bank Dummy -0.002 -0.001 0.002 0.002 0.001 -0.003 -0.001 0.005 0.005 0.006 -0.004 -0.004 -0.004 -0.005 -0.007***
(-0.82) (-0.46) (0.75) (0.72) (0.34) (-0.70) (-0.27) (1.44) (1.45) (1.37) (-1.42) (-1.42) (-1.35) (-1.48) (-3.56)
Subsidiary Bank Dummy -0.003 -0.003 -0.001 -0.001 0.001 -0.004 -0.003 -0.000 -0.000 0.000 -0.001 -0.001 -0.001 -0.001 0.002
(-1.44) (-1.22) (-0.47) (-0.41) (0.26) (-1.21) (-0.89) (-0.18) (-0.10) (0.11) (-0.61) (-0.61) (-0.42) (-0.38) (0.58)
Young Bank Dummy 0.001 0.001 0.002 0.002 0.004 -0.002 -0.002 0.000 0.000 0.002 0.006** 0.006** 0.008*** 0.008*** 0.008***
(0.32) (0.56) (1.14) (1.14) (1.43) (-0.59) (-0.68) (0.07) (0.02) (0.38) (2.44) (2.44) (3.29) (3.32) (3.10)
Middle-Age Bank Dummy 0.003 0.003 0.004* 0.004* 0.004* 0.005 0.004 0.006** 0.005* 0.006* 0.003 0.003 0.002 0.002 0.003
(1.60) (1.42) (1.91) (1.89) (1.88) (1.56) (1.31) (2.01) (1.93) (1.79) (0.88) (0.96) (1.04) (1.11) (1.05)
Constant 0.007 0.060*** -0.015 -0.002 -0.001 0.004 0.064*** -0.026 0.000 0.007 -0.026*** -0.001 -0.029** -0.010 -0.020
(0.58) (5.33) (-1.31) (-0.18) (-0.07) (0.15) (3.08) (-0.98) (.) (0.19) (-2.67) (-0.05) (-2.40) (-0.75) (-1.52)
Number of Observations 2,418 2,405 2,069 2,064 1,725 1,159 1,146 965 960 759 1,259 1,259 1,104 1,104 966
Number of Banks 436 432 380 380 370 261 256 223 223 204 260 260 227 227 224
R-Sq: Within Group 0.008 0.020 0.028 0.031 0.042 0.012 0.017 0.028 0.030 0.050 0.010 0.028 0.052 0.055 0.048
R-Sq: Overall 0.150 0.151 0.127 0.128 0.141 0.183 0.188 0.155 0.157 0.163 0.108 0.110 0.138 0.139 0.172
47
Annex 8
Regression Estimates of Stability Model Using Logarithm of 3-Year Rolling Window Zscore and its Components as the Proxy
Variables Log Zscore
Log
SDROAA
Log
Zscore P1
Log
Zscore P2
Log Zscore
Log
SDROAA
Log
Zscore P1
Log
Zscore P2
Log Zscore
Log
SDROAA
Log
Zscore P1
Log
Zscore P2
Islamic Bank Dummy 0.035 0.010 0.209 -0.015 0.329 -0.181 0.430 0.144 0.018 0.083 0.124 0.042
(0.23) (0.07) (1.36) (-0.10) (1.01) (-0.59) (1.63) (0.44) (0.11) (0.52) (0.67) (0.24)
Islamic Window Dummy 0.038 -0.109 0.195 0.023 -0.074 0.213 -0.119 -0.113 0.094 -0.185 0.293* 0.114
(0.27) (-0.80) (1.13) (0.16) (-0.29) (0.76) (-0.32) (-0.44) (0.63) (-1.30) (1.68) (0.75)
Log of Total Assets (-1) 0.009 -0.158*** 0.151*** -0.014 0.189* -0.436*** 0.456*** 0.169 0.032 -0.101** 0.070 0.015
(0.25) (-4.26) (3.10) (-0.37) (1.78) (-4.09) (3.09) (1.59) (0.59) (-1.96) (1.08) (0.27)
Total Assets Growth (-1) -0.227** 0.136 -0.140 -0.248** -0.308** 0.201* -0.447*** -0.310** -0.197 0.157 0.030 -0.223*
(-2.25) (1.47) (-1.19) (-2.45) (-2.09) (1.66) (-2.67) (-2.12) (-1.56) (1.28) (0.20) (-1.78)
Liquid Assets to Deposits & Short-
Term Funding Ratio (-1) 0.137 0.093 0.114 0.133 0.397** -0.210 0.567*** 0.383** -0.127 0.250 -0.247 -0.125
(1.19) (0.83) (0.97) (1.13) (2.48) (-1.38) (3.18) (2.43) (-0.85) (1.62) (-1.56) (-0.76)
Net Com. Trad. to Total Operating
Income Ratio (-1) -1.033*** 0.922*** -0.882** -0.970*** -0.241 0.345 -0.024 -0.242 -1.505*** 1.276*** -1.419*** -1.434***
(-3.07) (3.05) (-2.24) (-2.92) (-0.54) (0.76) (-0.05) (-0.55) (-3.59) (3.36) (-2.75) (-3.44)
Inefficiency (-1) -0.216 0.064 -0.239 -0.246 0.005 -0.159 -0.286 0.043 -0.422 0.355 -0.286 -0.517*
(-1.09) (0.34) (-1.08) (-1.24) (0.02) (-0.57) (-0.88) (0.16) (-1.56) (1.39) (-1.01) (-1.87)
State-Owned Bank Dummy 0.043 -0.017 -0.015 0.036 0.083 0.044 0.090 0.012 0.065 -0.053 0.002 0.057
(0.25) (-0.10) (-0.07) (0.20) (0.28) (0.17) (0.25) (0.04) (0.34) (-0.29) (0.01) (0.28)
Foreign-Owned Bank Dummy -0.438** 0.525*** -0.609** -0.424* -0.213 0.757*** -0.325 -0.180 -0.731** 0.443 -1.021** -0.701**
(-2.01) (3.02) (-2.21) (-1.90) (-0.69) (3.10) (-0.99) (-0.56) (-2.16) (1.60) (-2.36) (-2.02)
Subsidiary Bank Dummy -0.054 0.171 0.159 -0.064 -0.083 0.379** 0.095 -0.012 -0.124 0.170 -0.076 -0.182
(-0.40) (1.36) (1.02) (-0.47) (-0.39) (2.03) (0.37) (-0.06) (-0.72) (1.02) (-0.38) (-1.02)
Constant 3.949*** -3.859*** -0.463 3.671*** 0.353 0.531 -5.134*** 0.374 5.634*** -5.462*** 2.486** 4.154***
(5.82) (-5.62) (-0.54) (5.29) (0.26) (0.36) (-2.70) (0.24) (5.87) (-5.64) (2.30) (4.21)
Year Dummies? Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country Dummies? Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Number of Observations 1,191 1,207 1,151 1,197 447 457 420 449 744 750 731 748
Number of Bank 315 318 306 316 152 155 144 153 205 205 204 205
R-sq. within group 0.033 0.040 0.017 0.033 0.050 0.037 0.034 0.054 0.052 0.059 0.032 0.050
R-sq. between group 0.239 0.315 0.182 0.268 0.323 0.357 0.310 0.371 0.258 0.336 0.222 0.261
R-sq. overall 0.198 0.252 0.127 0.214 0.283 0.271 0.181 0.312 0.215 0.294 0.164 0.217
Acquiring banks are excluded from the sample, since the volatility on their assets returns can be due to the acquisition. Banks need to have three consecutive observations.
Zscore=(ROAA+ETA)/SD(ROAA). ROAA = ROAA at time t. ETA = Equity to Asset Ratio at time t. SD(ROAA) = standard deviation of ROAA at time t. Zscorep1 = ROAA/SD(ROAA). Zscorep2 =
ETA/SD(ROAA). Robust z-statistics in parentheses, * significant at 10%, ** significant at 5%, *** significant at 1%

Risk and Stability in Islamic Banking

Transféré par

Informations du document

Description originale:

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Risk and Stability in Islamic Banking

Transféré par

Droits d'auteur :

Formats disponibles

Electronic copy available at: http://ssrn.

Vous aimerez peut-être aussi