Predicting Distress in Islamic Banks: The Effectiveness of Capital Measures in CAMELS Framework

Authors

  • Zahid ur Rehman Khokher Institute of Islamic Banking and Finance, International Islamic University
  • Syed Musa bin Syed Jaafar Alhabshi Institute of Islamic Banking and Finance, International Islamic University

Keywords:

Early Warning System, Leverage Ratio, Bank Failure, Basel III, CAMELS, Risk-Based Capital, Regulation, Islamic Banks, Emerging Markets.

Abstract

This study aims to identify key capital adequacy measures and other parameters that effectively predict distress in Islamic banks taking a panel of 65 banks from 13 countries between 2008-2017 using logistic regression model. The paper also intends to see whether simpler ratios perform better than more complex, risk weighted measures in predicting distress in these banks. A total of nine alternative capital and leverage indicators are used in the model that mainly rely on financial and accounting data, which are supplemented by the addition of market leverage for listed banks. In order to capture variability in cross country analysis and impact of economic conditions and shocks, the study also adds several macroeconomic indicators in the model. The results suggest that most of the standard CAMELS indicators are relevant for studying distress in Islamic banks. Further, it is shown that three other capital ratios – Tier 1, tangible common ratio and market leverage - are equally effective in studying Islamic bank failures. The findings, however, reflect that Basel III leverage ratio and other accounting-based ratios do not offer effective early warning signals of Islamic bank stress. Overall, equity based risk-weighted capital ratios offer a more robust framework of regulation and supervision in Islamic banks.

Downloads

Published

2019-09-24

How to Cite

Khokher, Z. ur R., & Alhabshi, S. M. bin S. J. (2019). Predicting Distress in Islamic Banks: The Effectiveness of Capital Measures in CAMELS Framework. Journal of Reviews on Global Economics, 8, 643–661. Retrieved from http://lifescienceglobalca.com/index.php/jrge/article/view/6131

Issue

Vol. 8 (2019)

Section

Special Issue - Nexus between Financial Markets, Technology and Firm Performance in Era of Industry 4.0

License

Policy for Journals/Articles with Open Access

Authors who publish with this journal agree to the following terms:

  • Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.

  • Authors are permitted and encouraged to post links to their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work

Policy for Journals / Manuscript with Paid Access

Authors who publish with this journal agree to the following terms:

  • Publisher retain copyright .

  • Authors are permitted and encouraged to post links to their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work .