Socioeconomic Development and Its Effect on

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provisions to total loans (LLP/TL) is incorporated as an independent variable in ... Ben Naceur and Goaied (2008) and Hassan and Bashir (2003) have found a ..... impact on the profitability of Islamic banks even at 5 % significant level in all the.
Chapter 14

Socioeconomic Development and Its Effect on Performance of Islamic Banks: Dynamic Panel Approaches Mohammad Ashraful Ferdous Chowdhury, Md. Mahmudul Haque, Syed Othman Alhabshi, and Abul Mansur Mohammed Masih Abstract ,VODPLFEDQNVDUHKLJKO\LQFRUSRUDWHGZLWKVRFLDOLVVXHVEHFDXVHRIWKHLU UXOHVDQGUHJXODWLRQV3URÀWQRWRQO\GHSHQGVRQLWVRZQUHWXUQDQGLQYHVWPHQWEXW DOVRRQWUXVWPRUDOLVVXHVZKLFKPD\EHPRUHUHODWHGWREDQNLQJSURÀWDELOLW\7R test these gaps, this chapter attempts to investigate the socioeconomic factors along ZLWK EDQNVSHFLÀF IDFWRUV RI JOREDO ,VODPLF EDQNV XVLQJ G\QDPLF *00 DQG Quantile regression. The dataset used in this study involves 55 full-fledged Islamic %DQNVIURPFRXQWULHVDFURVVWKHJOREH7KHUHVXOWVVXJJHVWWKDW5HWXUQRQ$VVHWV 52$ LVVLJQLÀFDQWO\SRVLWLYHWREDQNVSHFLÀFIDFWRUVVXFKDVFUHGLWULVNKDVDQG statistically negative to cost-to-income ratio. It is also suggested that the relationVKLSEHWZHHQULVNDQGUHWXUQLVKHWHURJHQHRXVRUGLVVLPLODUDFURVVGLIIHUHQWTXDQtiles. Findings of the study tend to unravel that the socioeconomic factors especially SROLWLFDOVWDELOLW\DQGLQYHVWPHQWIUHHGRPKDYHSRVLWLYHDQGVLJQLÀFDQWUHODWLRQWR WKH,VODPLFEDQNSHUIRUPDQFH Keywords 52$‡6RFLRHFRQRPLFIDFWRUV‡&UHGLWULVN‡'\QDPLF*00‡4XDQWLOH regression

14.1 Introduction 5LVNVKDULQJLVDXQLTXHFKDUDFWHULVWLFLQWKH,VODPLFÀQDQFLDOV\VWHPWKDWSURYLGHV WKHÀQDQFLDOVWDELOLW\HQULFKHGÀQDQFLDOLQFOXVLRQOHDGLQJWRVXVWDLQDEOHGHYHORSPHQW+RZHYHUWKHLPSOHPHQWDWLRQRIWKHULVNVKDULQJFRQFHSWGHSHQGVRQDIHZ

M.A.F. Chowdhury (*) INCEIF and Shahjalal University of Science and Technology, Sylhet, Bangladesh e-mail: [email protected] 00+DTXH‡62$OKDEVKL‡$000DVLK INCEIF, Lorong Universiti A, Kuala Lumpur 59100, Malaysia © Springer International Publishing Switzerland 2016 M. Zulkhibri et al. (eds.), Macroprudential Regulation and Policy for the Islamic Financial Industry, DOI 10.1007/978-3-319-30445-8_14

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SUHUHTXLVLWHV VXFK DV WUDQVSDUHQF\ DQG DFFRXQWDELOLW\ JRRG JRYHUQDQFH FRQWDFWV enforcement, effective monitoring, well-structured economic institutions, and effiFLHQW ÀQDQFLDO PDUNHWV 8QIRUWXQDWHO\ WKH FXUUHQW VWDWH RI DIIDLUV VKRZV WKDW D PDMRULW\RIWKH2UJDQL]DWLRQRI,VODPLFFRRSHUDWLRQ 2,& FRXQWULHVGRQRWPHHW these prerequisites (Ng et al. 2015 ,WLVQRZEHLQJLQFUHDVLQJO\UHDOL]HGWKDWWKH ,VODPLFEDQNVPD\EHDQDOWHUQDWLYHWRFRQYHQWLRQDOEDQNVSDUWLFXODUO\GXULQJWKH FULVLVSHULRGVDVUHÁHFWHGLQWKHUDSLGJURZWKRI,VODPLFEDQNLQJVLQFHWKHUHFHQW ÀQDQFLDOFULVHV7KHDPRXQWRIULVNIDFHGE\EDQNVLVXVXDOO\RIJUHDWFRQFHUQWRWKH SROLF\PDNHUV 8QOLNHWKHFRQYHQWLRQDOEDQNV,VODPLFEDQNVSURPRWHULVNVKDULQJSULQFLSOHVE\ using many investment tools such as Mudarabah and Musharakah'XHWRWKHG\QDPLVPRIGLIIHUHQWFRQWUDFWVLWLVJHQHUDOO\SHUFHLYHGWKDWWKHULVNLVFRPSDUDWLYHO\ KLJKHULQ,VODPLFEDQNVFRPSDUHGWRWKHLUFRQYHQWLRQDOFRXQWHUSDUWV,WLVXVXDOO\ DUJXHG WKDW ,VODPLF %DQNV KDYH KLJKHU GHJUHH RI FUHGLW ULVNV WKDQ LQWHUHVWEDVHG EDQNVPDLQO\EHFDXVHRIWKHLUQDWXUHRIWUDGHEDVHGLQYHVWPHQW8SXQWLOQRZWKH ULVNUHWXUQUHODWLRQVKLSH[DPLQHGE\SUHYLRXVUHVHDUFKHUVZDVIRXQGWREHSRVLWLYH negative, or curvilinear (Nwude 2012 7KHUREXVWJURZWKLQÀQDQFLQJDQGLQYHVWment activities across most jurisdictions in various real sectors has helped Islamic EDQNV UHFRUG JHQHURXV DVVHW JURZWK UDWHV LQ WKHLU EDODQFH VKHHWV +RZHYHU WKH UHWXUQVEHFDPHVXEGXHGGXULQJWKHÀQDQFLDOFULVLVRI\HDUVRI²UHDFKLQJ ORZVRI52$DQG52(LQ ,)6% 6LQFH,VODPLFEDQNVDUH SDUWLFLSDWRU\EDVHGLWFRXOGEHVDLGWKDWWKLVVXEGXHG,VODPLFEDQNLQJSHUIRUPDQFH LVQRWRQO\FDXVHGE\WKHÀQDQFLDOGRZQWXUQEXWDOVRE\VRFLRHFRQRPLFLQVWDELOLW\ VXFKDV$UDE6SULQJ In any economy, socioeconomic freedom is a major dimension, which will affect EDQNSHUIRUPDQFH7KHUROHRIVRFLRHFRQRPLFIUHHGRPKDVDVVXPHGDGHYHORSPHQWDOFKDUDFWHULQFDSLWDOPDUNHWVIROORZLQJWKHOLEHUDOL]DWLRQRIVWRFNPDUNHWV,QD setting which reflects socioeconomic freedom fluctuating widely across countries, LQYHVWRUVZRUOGZLGHLQHTXLW\PDUNHWVSHUFHLYHLWDVIDVFLQDWLQJWRVSRWDWWUDFWLYH investment opportunities. Socioeconomic freedom particularly easing the regulaWRU\IUDPHZRUNKHOSVLQWHUQDWLRQDOLQYHVWRUVSHQHWUDWHLQWRGRPHVWLFPDUNHWV,WLV EURDGO\DVVHVVHGWKDWHFRQRPLFIUHHGRPLVDFUXFLDOIDFWRULQGHWHUPLQLQJWKHZHOO EHLQJDWPDVVOHYHO&RXQWULHVZLWKPRUHHFRQRPLFIUHHGRPWHQGWREHZHDOWK\DQG WKHLUÀQDQFLDOPDUNHWVWHQGWREHPRUHVWDEOHFRPSDUHGWRWKHFRXQWULHVKDYLQJD ORZHUGHJUHHRIHFRQRPLFIUHHGRP6WRFNPDUNHWVRIWKHFRXQWULHVZLWKKLJKHUHFRQRPLF IUHHGRP SHUIRUP EHWWHU DQG DUH PRUH VWDEOH &KHQ DQG +XDQJ 2009). 0HDQZKLOH6PLPRXDQG.DUDEHJRYLF 2010) have the view that financial developPHQWLVQRWGHWHUPLQHGE\FDSLWDOLVP SUR[\RIHFRQRPLFIUHHGRPUHPDUNDEO\IUHH PDUNHWV\VWHP UDWKHULWLVDSUHFRQGLWLRQIRUEDQNLQJSHUIRUPDQFHDQGGHYHORSPHQW0RUHVSHFLÀFDOO\WKLVJURZWKOLWHUDWXUHSRLQWVRXWWKDWVWDEOHDQGSUHGLFWDEOH rule of law, good enforcement of contracts, protection of individual and investment IUHHGRPODERUPRYHPHQWDQGSURSHUW\ULJKWVVRXQGPRQH\DQGVRRQDUHWKHNH\V to economic progress. 'HVSLWHWKHVLJQLÀFDQWGHYHORSPHQWRIDOO,VODPLFEDQNVZRUOGZLGHWKHUHZHUH UHODWLYHO\IHZHPSLULFDOZRUNVRQ,VODPLFEDQN·VSHUIRUPDQFHZKLFKLVTXLHWLQLWV LQIDQF\7RGDWHHPSLULFDOVWXGLHVRQWKHSHUIRUPDQFHRIWKHEDQNLQJVHFWRULQERWK

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EDQNVWKDWDUHPRUHSURGXFWLYHDQGHIÀFLHQWVKRXOGNHHSWKHLURSHUDWLQJFRVWORZ %HQ1DFHXUDQG*RDLHG ) and Hassan and Bashir (2003) have found a positive LPSDFWRQWKHSHUIRUPDQFHRIWKH,VODPLFEDQNVZKHUHDV.RVPLGRXHWDO 2005) KDYHIRXQGDQHJDWLYHUHODWLRQWRWKHSHUIRUPDQFHRIWKHEDQNV 0RUHRYHU D VWXG\ FRQGXFWHG E\ $KPDG DQG $KPDG ) on Malaysian ,VODPLFEDQNVFUHGLWULVN7KHVWXG\FRQFOXGHVWKDWDVVHWVVL]HULVN\DVVHWVUDWLR DQG,VODPLFEDQNVPDQDJHPHQWHIÀFLHQF\HIIHFWZHUHIRXQGVWDWLVWLFDOO\VLJQLÀFDQWRQ ,VODPLFEDQNVFUHGLWULVN,QWKH0LGGOH(DVWDVWXG\FRQGXFWHGE\%DVKLU 2003) H[DPLQHGWKHLQWHUQDOYDULDEOHVDQGHFRQRPLFHQYLURQPHQWLPSDFWRQWKHSHUIRUPDQFHRI,VODPLFEDQNV7KHVWDWLVWLFDOO\VLJQLÀFDQWDQGSRVLWLYHUHODWLRQVKLSZDV IRXQGEHWZHHQFDSLWDODGHTXDF\DQGSURÀWDELOLW\RI,VODPLFEDQNV7KHUHVHDUFKHU DOVRFRQFOXGHGIURPWKHVWXG\WKDWIRUHLJQHUVRZQHG,VODPLFEDQNVKDYHDELOLW\WR DWWDLQKLJKHUSURÀWUDWLRWKHQWKHEDQNVORFDOO\RZQHG7KHSRVLWLYHLPSDFWDQGVWDWLVWLFDOO\VLJQLÀFDQWUHODWLRQVKLSRILQÁDWLRQZDVDOVRIRXQGRQWKHSURÀWDELOLW\RI 0LGGOH(DVW,VODPLFEDQNV )URPWKHVRFLRHFRQRPLFSHUVSHFWLYHVWKHUHKDYHEHHQDQXPEHURIVWXGLHVZKLFK H[SORUHWKDWVRFLRHFRQRPLFIUHHGRPLQÁXHQFHVHFRQRPLFJURZWK +HFNHOPDQDQG .QDFN2009$OWPDQ3RZHOO2002$GNLQVHWDO20025HHGRPDQG5RZWK 2000  7KH ÀQGLQJV IURP PRVW RI WKH VWXGLHV UHYHDO WKDW WKHUH H[LVWV D SRVLWLYH LPSDFWRIYDULRXVPHDVXUHVRIHFRQRPLFIUHHGRPRQHFRQRPLFJURZWK5HPDUNDEO\ DEVHQWLQWKHOLWHUDWXUHLVDQH[DPLQDWLRQRIWKHOLQNVEHWZHHQHFRQRPLFIUHHGRP DQG EDQN SHUIRUPDQFH 7KH OLPLWHG UHVHDUFK LQ WKLV DUHD LV VRPHZKDW VXUSULVLQJ JLYHQWKHLPSRUWDQFHRIEDQNVSHFLÀFIDFWRUVLQSURPRWLQJHFRQRPLFGHYHORSPHQW (Chinn and Ito /HYLQHDQG=HUYRV) and the impact of socioeconomic IUHHGRPLVDOVROLNHO\WRKDYHHIIHFWRQWKHEDQNLQJVHFWRU$GGLWLRQDOO\RQWKHHFRQRPLFIUHHGRPLQGH[HVH[WHQVLYHHPSLULFDOVWXGLHVKDYHEHHQSURGXFHG &KRUWDUHDV et al. 2013). While Sala-i-Martin et al. (2013) consider the effects of economic freedom on inequality, and consider income convergence aggregate productive effiFLHQF\,QGH[HVRIHFRQRPLFIUHHGRPKDYHDOVREHHQXVHGDVH[SODQDWRU\YDULDEOHV LQÀQDQFLDOHFRQRPLFV 5R\FKRXGKXU\DQG/DZVRQ2010-RQHVDQG6WURXS2010) FKDUDFWHUL]LQJWKHHIIHFWVRIWKHUHFHQWJOREDOUHFHVVLRQ *LDQQRQHHWDO2011). 7KHUHKDYHEHHQDQH[WHQVLYHQXPEHURIUHVHDUFKHVWKDWFRQVLGHUWKHHIIHFWVRI WKHHFRQRPLFIUHHGRPLQGH[HVRQYDULRXVDVSHFWVRIWKHHFRQRP\DQGIRXQGWKH HYLGHQFHWKDWHFRQRPLHVHQMR\LQJDKLJKGHJUHHRIHFRQRPLFIUHHGRPFDQRQEDODQFHDFKLHYHEHWWHUHFRQRPLFRXWFRPHV,QWKHÀQDQFLDOHFRQRPLFVDQGEDQNLQJ OLWHUDWXUHWKHLQGH[HVRIHFRQRPLFIUHHGRPKDYHEHHQXVHGDVFRQWUROYDULDEOHVLQ YDULRXV FRQWH[WV 5R\FKRXGKXU\ DQG /DZVRQ 2010 -RQHV DQG 6WURXS 2010). A QXPEHURIVWXGLHVKDYHDOUHDG\LQFOXGHGLQGLFDWRUVWKDWH[DPLQHWKHGHJUHHRIÀQDQFLDOOLEHUDOL]DWLRQ/D3RUWDHWDO 2000 GRHVQRWGLUHFWO\DFFRXQWIRUEDQNLQJVHFWRU·V HIÀFLHQF\ EXW LQFOXGH WUDGLWLRQDO LQGLFDWRUV RI FRPPRQ ODZ FUHGLWRU ULJKWV UXOH RI ODZ DQG ÀQG WKDW FRXQWULHV ZLWK PRUH UREXVW LQYHVWRU SURWHFWLRQ ZKHUH DJHQF\FRVWVDUHUHVWULFWHGE\WKHODZ KDYHODUJHUFDSLWDOPDUNHWV7KH´UXOHRIODZµ KDVEHHQDOVRXVHGWRFDSWXUHWKHHIIHFWVRIVHYHUHHQIRUFHPHQWSUDFWLFHVIRUDQ\ given level of creditors or shareholders protection. In contrast, Fries and Taci (2005) FRQVLGHUWKHUROHRIEDQNLQJVHFWRUUHIRUPDQGOLEHUDOL]DWLRQLQWKHWUDQVLWLRQFRXQWULHVWRFDSWXUHWKHHIIHFWRQEDQNFRVWHIÀFLHQF\

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While most of the research has highlighted the growth of the Islamic financial LQGXVWU\DQGWKHGHWHUPLQDQWVRIVXFKJURZWKUREXVWIXUWKHUVWXG\LVHVVHQWLDOIRUWKH potential and growth of the industry. To that effect, there is a strong demand to put the IXWXUHSURVSHFWVIRUWKHLQGXVWU\·VGHYHORSPHQWZLWKLQWKHRYHUDOOFRQWH[WRIÀQDQFLDO DQGLQVWLWXWLRQDOGHYHORSPHQWHVSHFLDOO\LQWKHPHPEHUVWDWHVRIWKH2,&FRXQWULHV 7KHÀQGLQJVRIWKHVWXG\DGGQHZGLPHQVLRQLQWKH,VODPLFEDQNLQJLQGXVWU\

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14.3.2 Methodology 7KH PHWKRGRORJLHV DSSOLHG LQ WKLV VWXG\ DUH ERWK VWDWLF PRGHO ZKLFK KDYH EHHQ XVHGLQQXPHURXVVWXGLHVDQGWKHG\QDPLFRQHEDVHGRQ%HUJHU 1995) and more UHFHQWO\*RGGDUGHWDO ) and Athanasoglou et al. ( $V0DPDW]DNLVDQG 5HPRXQGRV 2003) argue dynamic model uses more information and consequently WKHGHWHUPLQDQWIDFWRUVZLOOEHHVWLPDWHGPRUHHIÀFLHQWO\,QWKLVVWXG\ERWKVWDWLF and dynamic models are applied.

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14.3.3 Static Models (Fixed and Random Effects) 7KHSDQHOGDWDLVXVHGLQDQDO\]LQJWKHEDQN·VSRUWDELOLW\GHWHUPLQDQWV,QWKHSDQHO data, the used model consists nFURVVVHFWLRQDOXQLWVGHQRWHGE\n = 1, NREVHUYHG at each of T time periods, t = 1, …, T,QGDWDVHWWKHWRWDOREVHUYDWLRQLVn × T. 7KHEDVLFIUDPHZRUNIRUWKHSDQHOGDWDLVGHÀQHGDVSHUWKHIROORZLQJUHJUHVVLRQ model: Ynt = a + b X nt + e nt



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where YLVUHWXUQRQDVVHWV 52$ &,5LVFRVWWRLQFRPHUDWLR/7$LVQDWXUDOORJ RI WRWDO DVVHWV //5*/ LV ORDQ ORVV UHVHUYH RYHU JURVV ORDQ &25 LV FRUUXSWLRQ 32/6LVSROLWLFDOVWDELOLW\,),LVLQYHVWPHQWIUHHGRP35LVSURSHUW\ULJKWVDQGε is error term.

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LQVWUXPHQWVXVHGKDYHQHDUXQLWURRWSURSHUWLHV8VHRIWKHV\VWHP*00UHVXOWVLQ QRWDEO\ VPDOOHU ÀQLWH VDPSOH ELDV DQG PXFK JUHDWHU SUHFLVLRQ ZKHQ HVWLPDWLQJ autoregressive parameters using persistent series (Bond 2002). In addition, The *00 V\VWHP FRQWUROV IRU XQREVHUYHG KHWHURJHQHLW\ DQG IRU SHUVLVWHQFH RI WKH GHSHQGHQWYDULDEOH7KHIROORZLQJIRUPXODIRU*00SURSRVHGE\$WKDQDVRJORX et al. () is used to conduct the empirical analysis: j =1

m =1

j

m

II t = C + d II i , t -1 + å b j X j it + å b j X m it + e it



where IItLVWKHSUREDELOLW\RIEDQNi at time t where i = 1 … N, t = 1, C is the Constant Term. II i ,t -1 LVWKHODJYDOXHRIGHSHQGHQWYDULDEOHXitLVWKHH[SODQDWRU\YDULDEOHV and εitWKHGLVWXUEDQFHWHUPZLWKvitWKHXQREVHUYHGEDQNVSHFLÀFHIIHFWDQGuit the idiosyncratic error. This is a one-way component regression model, where vet ~ IIN (0, σv2) and independent of uit ~ (0, σu2). The XitLVJURXSHGLQWREDQNVSHFLÀFXjit and PDFURHFRQRPLFYDULDEOHXmit.

14.3.5 Quantile Regression (QR) Model 7KLVVWXG\HPSOR\VD45PRGHOLQZKLFKWKHSDUDPHWHURIH[SODQDWRU\YDULDEOHV FDQEHH[SUHVVHGDVDPRQRWRQHIXQFWLRQRIDVLQJOHVFDODUUDQGRPYDULDEOH7KH PRGHOFDSWXUHVV\VWHPDWLFLQÁXHQFHVRIFRQGLWLRQLQJYDULDEOHVRQORFDWLRQVFDOH DQGVKDSHRIWKHFRQGLWLRQDOGLVWULEXWLRQRIWKHUHVSRQVH7KHPRGHOLVWKXVVLJQLÀFDQWO\H[WHQGHGZLWKDFRQVWDQWFRHIÀFLHQWLQZKLFKWKHHIIHFWVRIFRQGLWLRQLQJDUH confined to a location shift. Furthermore, this study reveals that traditional optimi]DWLRQWHFKQLTXHVLQFOXGLQJ2/6DQG/$'GLVUHJDUGGLIIHUHQWEHKDYLRUVLQWKHWDLO UHJLRQVRIEDQNSURÀWDELOLW\GLVWULEXWLRQVDQGWKHULVN²UHWXUQUHODWLRQVKLSVLQEDQNV FKDQJHLQWKHWDLOUHJLRQV)ROORZLQJWKLVOLQHRIWKRXJKWD45WHFKQLTXHGHYHORSHG E\.RHQNHUDQG%DVVHWW  LVXVHGLQWKLVVWXG\WRH[DPLQHWKHG\QDPLFUHODWLRQVKLSEHWZHHQWKHULVNDQGEDQNSURÀWDELOLW\SHUIRUPDQFH Assuming that the θWKTXDQWLOHRIWKHFRQGLWLRQDOGLVWULEXWLRQRIWKHH[SODLQHG YDULDEOHLVOLQHDULQx where Quant XiWKHFRQGLWLRQDO45PRGHOFDQEHH[SUHVVHG as follows: Yi = x ’i × bq + uq i Quantq ( yi | xi ) = inf { y : Fi ( y | x )q } = x ’i × bq



Quantq ( uq i | xi ) = 0

where Quantθ (yi│xi) represents the θ the conditional quantile of yi on the regressor vector xiβθLVWKHXQNQRZQYHFWRURISDUDPHWHUVWREHHVWLPDWHGIRUGLIIHUHQWYDOXHV of θLQ  uθiLVWKHHUURUWHUPDVVXPHGWREHFRQWLQXRXVO\GLIIHUHQWLDEOHFGI (cumulative density function) of F i(y│x)θ and a density function F i(y│x)θ.



M.A.F. Chowdhury et al.

The value Fi(y│x)θ GHQRWHV WKH FRQGLWLRQDO GLVWULEXWLRQ RI y conditional on x. 9DU\LQJWKHYDOXHRIuIURPWRUHYHDOVWKHHQWLUHGLVWULEXWLRQRIy conditional on x. The estimator for uLVREWDLQHGIURP i :u >= 0

min

åq

x

uq +

i :u = 0

å (1 - q )

x

| yi - x ’i × bq



i : yi - x ’i . b