Deficiency Risk in Islamic and Conventional Banks

In this article, we have elaborated a study over the
nature of financial intermediation in Islamic banks by comparison to
those of conventional ones. We have found a striking difference
between two kinds of intermediation. We tried, from another side, to
study the relationship between the capital level and deficiency risk
relying on econometric model, and we have obtained a positive and
significant relation between the capital and the deficiency risk for the
conventional banks. This means that when the capital of these banks
increases, the deficiency risk increases as well. In return, since the
Islamic banks are constrained to respect the Sharia Committee as well
as customers’ demands that may, in certain contracts, choose to
invest their capitals in projects they are interested in. These
constraints have as effects to reduce the deficiency risk even when
the capital increases.

• Korbi Fakhri

• Conventional bank
• deficiency risk
• financial intermediation
• Islamic bank.

[1] Iqbal, Z and A. Mirakhor. An Introduction to Islamic Finance: Theory
and Practice; Wiley Finance. (1987).
[2] Zaher, T.S., Hassan, M.K. A Comparative Literature Survey of Islamic
Finance and Banking; Financial Markets, Institutions & Instruments.
(2001).
[3] Khoja, E.M. Instruments of Islamic Investment, Dallah Al-baraka
Group, Jeddah, Saudi Arabia, pp. 25-36, 57-82. (1995).
[4] Kamal, N. Ahmad, J. and Al khatib, K. Islamic banking: a study of
customer satisfaction and preferences in Jordan. International Journal of
Bank Marketing, . 17, no. 3. pp. 135-151. (1999).
[5] Siddiqi, M.N. Islamic Banking and Finance in Theory and Practice: A
Survey of state of the Art. Islamic Economic Studies, vol 13, N°2.
(2006).
[6] Sundararajan, V. Issues in Managing Profit Equalisation Reserves and
Investment Risk Reserves in Islamic Banks. Journal of Islamic
Economics, Banking and Finance, Vol.4, p. 1-11. (2008).
[7] Pal, I.D. Pakistan and the Question of Riba. Middle Eastern Studies
January, Vol. 30, No. 1, pp. 64-78. (1994). [8] Toumi K., Viviani J-L. Le risque lié aux comptes d’investissement
participatifs : un risque propre aux banques islamiques. Revue des
Sciences de Gestion. (2013).
[9] Taktak, N.B., Zouari, S.B.S. and Boudriga, A. Do Islamic banks use
loan loss provisions to smooth their results? Journal of Islamic
Accounting and Business Research. (2010).
[10] Koehn, M. and. Santomero, A. M. Regulation of Bank Capital and
Portfolio Risk, Journal of Finance, 35, 1235-1244. (1980).
[11] Blum J. The Impact of Capital Requirements on Banks’ Incentive to
Monitor and hold Excess Capital. Swiss National Bank. (2003).
[12] Shrieves, R. E., Dahl, D. The Relationship Between Risk and Capital in
Commercial Banks. Journal of Banking and Finance, 16, 439 – 457.
(1992).
[13] Roy, A.D. Safety first and the holding of assets. Econometrica, 20:431–
449. (1952).
[14] Boyd, J.H. and Graham, S.L. Risk, Regulation, and bank Holding
Company Expansion into Non-banking. Federal Reserve Bank of
Minneapolis Quarterly Review, 2-17. (1986).
[15] Goyeau D., Tarazi A. Evaluation du risque de défaillance bancaire en
Europe. Revue d’Economie Politique 102 (2). (1992).
[16] Bourkhis, K. and Nabi, S.M. Have Islamic banks been more resistant
than conventional banks to the 2007-2008 financial crisis?. Politics and
economic development ERF 17th annual conference. (2011).