The impact of efficiency on discretionary loans/finance loss provision: A comparative study of Islamic and conventional banks (original) (raw)

The use of discretionary loan loss provision by Islamic banks and conventional banks in the Middle East region: A comparative study

The purpose of this research is to study earnings management practices of Islamic banks and conventional banks in the Middle East region. This paper seeks first, to examine factors that may have influenced Islamic banks managers' use of discretion in reporting loan loss provision and then to find out if there is any difference in theuse of the discretionary part of loan loss provisionbetween Islamic banks and Conventional banks. Our empirical study is based on a sample of 21 Islamic banks, 18 conventional banks with Islamic windows and 33 conventional banks, from 7 Middle East countries during a period that ranges from 2000 to 2008. Our empirical results reveal that Islamic banks do not use discretionary loan loss provision to manage their earnings; conversely, they use this item only to manage their capital. Other findings show no significant difference between Islamic banks, conventional banks which provide also Islamic services and conventional banks, in the use of discretionary loan loss provision; all banks behave in the same way dealing with DLLP. Our study contributes tothe existing literature onIslamic banking; it extends prior research by focusing on the use of the discretionary component of loan loss provision, unlike prior studies which evaluate the total loan loss provision item.

THE EFFICIENCY OF ISLAMIC BANKING INDUSTRY: A NON-PARAMETRIC ANALYSIS WITH NON-DISCRETIONARY INPUT VARIABLE

This paper investigates the performance of Malaysian Islamic banking sector during the period of 2001-2005. Several efficiency estimates of individual banks are evaluated using non-parametric Data Envelopment Analysis (DEA). Two different approaches have been employed to differentiate how efficiency scores vary with changes in inputs and outputs. To examine the impact of risk factor on Islamic bank efficiency, we have incorporated problem loans as a non-discretionary input variable in our analysis. The findings suggest that during the period of study, scale inefficiency dominates pure technical inefficiency in the Malaysian Islamic banking sector. We found that foreign banks have exhibited higher technical efficiency compared to their domestic peers. The inclusion of risk factors has mixed impact on Malaysian Islamic banks' efficiency. The results seems to suggest that while potential economies of scale may be overestimated when risk factors are excluded, pure technical efficiency estimates on the other hand, tend to be much more sensitive to the exclusion of risk factors. The empirical results from the Spearman and Pearson tests reinforce these findings.

Efficiency in Islamic Banking During a Financial Crisis-An Empirical Analysis of Forty-Seven Banks

Econometrics: Mathematical Methods & Programming eJournal, 2012

The present paper measured the efficiency of Islamic banks during economic troubles of 2006-2009 to address the question if Islamic banks were efficient and stable. This paper addresses this question by measuring efficiency through employing the on-parametric technique, Data Envelopment Analysis (DEA) and t test was used to test the hypotheses. This study extends research, which suggests that large Islamic banks showed an increase in efficiency during 2006 to 2008 and decline during 2009. However, small to medium Islamic bank sample started at a lower level of efficiency. In addition, the results showed that the efficiency of Islamic banks operates in Middle Eastern and non-Middle Eastern Counties have increased during an economic crisis.

The use of discretionary loan loss provisions by Islamic banks and conventional banks in the Middle East region

Studies in Economics and Finance, 2014

Purpose -The purpose of this paper is to study earnings management practices of Islamic banks and conventional banks in the Middle East region. First, the authors examine factors that may influence Islamic banks managers' use of discretion in reporting loan loss provisions (LLP). Second, the authors investigate differences that may exist between Islamic banks and non-Islamic banks in terms of discretionary loan loss provisions (DLLP) used to manipulate accounting earnings. Design/methodology/approach -This empirical study uses an unbalanced panel data of 21 Islamic banks, 18 conventional banks with Islamic windows and 33 conventional banks, from seven Middle East countries during a period that ranges from 2000 to 2008. The authors use a two-stage approach in order to examine factors that may influence the use of discretion by Islamic banks' managers. Findings -The empirical results reveal that Islamic banks use DLLP for both earnings and capital management. External financing is also found to be a determinant of DLLP. Additional findings show no significant differences among Islamic banks, conventional banks with Islamic windows and conventional banks in using DLLP. These three groups of banks behave similarly in terms of discretion based on DLLP. Practical implications -The findings are potentially useful for regulators, auditors and investors. This study provides regulators with insights to strengthen their financial regulations in order to improve accounting quality. In addition, it helps auditors when considering the provisioning policies adopted by banks in order to detect specific manipulations of accounting earnings. The results may also help investors to focus on the impact of managerial discretion on accounting earnings for evaluation purposes. Originality/value -This study contributes to the literature on Islamic banking. On the one hand, it extends prior research by examining the discretionary component of LLP, instead of being restricted to total LLP. On the other hand, it compares the use of discretion among three groups of banks: full Islamic banks, conventional banks with Islamic windows and full conventional banks.

Islamic Bank Incentives and Discretionary Loan Loss Provisions

papers.ssrn.com

The objective of this paper is to ascertain whether there are significant differences in the loan loss provisioning behaviour of Islamic banks as compared to conventional banks. We proposed that loan loss provisioning will be linked to the extent of profit distribution management. The results suggest that Islamic banks consistently record lower loan loss provisions. However, the association between profit distribution management and loan loss provisioning is mixed. The overall results tend to suggest that there is an inverse relationship between profit distribution management and loan loss provisions, which is contrary to the predicted association. The results also suggest that there are differential effects depending on whether the profit distribution management is for the benefit or the detriment of investment depositors. If there is a surplus of asset returns over profit distributions (positive profit distribution management), it is observed that Islamic banks increase their loan loss provisions in accordance with the prediction made in that study. However, this result does not extend to the full sample containing both Islamic and conventional banks. Further, there is no effect where the profit distribution management is for the benefit of investment depositors (i.e. where the Islamic bank decreases loan loss provisions when there is a deficiency of investment returns). 1 . I n t r o d u c t i o n A large array of theoretical and empirical literature has established that there are incentives for managers to smooth earnings and that they attempt to do so utilizing either their real or accounting discretion. Smooth earnings are widely cited as an indicator of earnings quality, partly attributed to its ability to mitigate firm-specific information risk (Francis, LeFond, Olsson and Schipper 2004). Smooth earnings also have special significance for banks. While investors in banks can diversify bank specific risk, idiosyncratic risk associated with the volatility of individual bank earnings cannot be diversified away by either bank managers and/or regulators. Such risks have potential systemic implications since the volatility of earnings (or significant losses) for one bank may cause a domino effect type system wide bank run. As a result, both bank managers and regulators have vested interests to ensure that earnings volatility is kept to a minimum for individual banks. To ensure that banks operate within the regulators tolerance levels, the regulators in most jurisdictions require monthly and quarterly reporting to monitor any potential unusual figures. To that extent, bank managers likely utilize both real and accounting choices to ensure that earnings demonstrate a smooth pattern. A large body of literature establishes the use of discretionary accounting choices such as loan loss provisions to manage bank earnings.

Non-Performing Loans and Bank Efficiency of Conventional and Islamic Banks in the Organization of Islamic Cooperation (OIC) Countries

Journal of Islamic Economics Banking and Finance, 2017

This paper investigates the inter-temporal relationships between bank efficiency and problem loans as well as financing of conventional and Islamic banks as proposed by Berger and DeYoung (1997). The efficiency level and the managerial behavior of conventional and Islamic banks in the Organization of Islamic Cooperation (OIC) countries divided into the regions: Asian, African, Middle East and Turkey are investigated during the period 1993-2007. The findings show that cost efficiency is higher than profit efficiency for the sampled banks in the OIC countries. As for the inter-temporal relationships between bank efficiency and problem loans and financing, suggests that there is no evidence for 'bad luck' of conventional banks in all regions, but support the 'bad management' and 'skimping' except in the African region. On the other hand for Islamic banks, there is evidence of 'bad luck' in Asia, the Middle East and Turkey, and support for 'bad management' in African and Middle East region and Turkey, except in Asia. All regions support 'skimping' behavior for Islamic banks. These findings imply that the increase of non-performing loans of conventional banks is mainly caused by poor management rather than external factors, but the increase of non-performing financing of Islamic banks are caused by both internal and external factors.

Discretionary Loan Loss Provisions, Earnings Management and Capital Management in Banks

Asian Social Science

The two past decades have been marked by a multitude of financial scandals (the Enron failure, WorldCom. etc.) mainly caused by the practices of earning management that have challenged the financial reporting quality disclosed. The purpose of this research is to study the determinants of discretionary loan loss provisions in banks. To achieve this objective, we selected a sample of the main Tunisian banks over the period from 2001 to 2014. The estimation results shows that the banks are opting for earnings management practices through the discretionary loan loss provisions in order to align with international standards, in particular with respect to regulatory capital. In opposition, we found a non-significant relationship between earnings before taxes and provisions and discretionary provisions.

Profitability and Cost Efficiency of Islamic Banks: A Panel Analysis of Some Selected Countries

International Journal of Economics and Financial Issues, 2016

This study aims to investigate the significant elements that predict profitability behavior of Islamic banks within the composition of cost efficiency. It is not clear whether Islamic banks can simultaneously achieve higher profitability with cost efficiency. The result of the first model in this study found all predicting variables are significantly explaining profitability after robust standard errors of fixed effect model. Also, the interaction between cost efficiency and bank activities within each country’s macroeconomic environment presents an attractive outcome of expense preference behavior. The paper advocated for prioritization of cost efficiency which has the tendencies of attaining both utilization of available resources and higher returns to satisfy all the stakeholders

International Journal of Economics and Financial Issues Profitability and Cost Efficiency of Islamic Banks: A Panel Analysis of Some Selected Countries

2016

This study aims to investigate the significant elements that predict profitability behavior of Islamic banks within the composition of cost efficiency. It is not clear whether Islamic banks can simultaneously achieve higher profitability with cost efficiency. The result of the first model in this study found all predicting variables are significantly explaining profitability after robust standard errors of fixed effect model. Also, the interaction between cost efficiency and bank activities within each country's macroeconomic environment presents an attractive outcome of expense preference behavior. The paper advocated for prioritization of cost efficiency which has the tendencies of attaining both utilization of available resources and higher returns to satisfy all the stakeholders.