Capital Adequacy Ratio: Determinants and Its Effect on the Bank's Efficiency in MENA Region

: Islamic Versus Conventional Banks

Abstract

This study investigates the Bank-particular and country-level factors of the capital adequacy ratio of conventional and Islamic banks in the MENA region. Additionally, this study tests whether the capital adequacy ratio affects the banks' efficiency and whether it has the same impact on both banking systems. A pooled cross-sectional regression is applied to test a population of 334 banks (282 conventional banks and 52 Islamic banks) from 2010 to 2019 from 17 countries in the MENA region namely; Algeria, Bahrain, Morocco, Egypt, Jordan, Kuwait, Qatar, Oman, Saudi Arabia, Lebanon, Tunisia, Syria, Israel, Yemen, the United Arab Emirates, and Gaza. Regarding the determinants of capital adequacy ratio, the pooled cross-sectional regression analysis shows that for all banks in the MENA region, the liquidity, deposits, loans, corruption index, size, and GDP are negatively associated with the capital adequacy ratio. In contrast, profitability, credit risk, and governance index are associated positively with the capital adequacy ratio. Moreover, it shows a significant distinction among the capital adequacy ratio of conventional and Islamic banks across the MENA region and conventional banks hold higher capital adequacy ratios than Islamic banks. However, the panel regression findings provide evidence that the influence of the profitability and governance index factors on the capital adequacy ratio differs significantly between conventional and Islamic banks. For conventional banks, the panel data regression analysis shows that profitability and governance quality are significantly and positively correlated with the capital adequacy ratio. While, deposits, size, and loans are significantly negatively associated with the capital adequacy ratio and liquidity and credit risk do not have any significant relationship with the capital adequacy ratio. For Islamic banks, only deposits, loans, size, and GDP show a significant adverse relation with the capital adequacy ratio. The Tobit panel regression analysis of the effect of the capital adequacy ratio on bank efficiency for conventional and Islamic banks indicates a significant positive relationship between the capital adequacy ratio and banks' efficiency. In addition, there is a discrepancy in the levels of the technical efficiency between conventional and Islamic banks and Islamic banks hold higher efficiency levels than conventional banks, and the difference is significant at level 1%. This comparison study contributes to the literature by allowing regulators to see whether the factors that influence the capital adequacy ratio as defined by Basel II criteria are identical for both banking systems or whether the difference in conceptual backgrounds of both banking systems impedes adherence to the same regulation.

Date of Award	10 May 2023
Original language	English
Awarding Institution	University of Portsmouth
Supervisor	Ahmed Aboud Mohamed Aboud (Supervisor) & Arief Daynes (Supervisor)