Analysis of the Determinants of Capital Adequacy Ratio: The Case of Full-Fledged Islamic Banks in the Gulf Cooperation Council (GCC)

Abdilatif Mao Ali

doi:10.13135/2421-2172/3742

Abdilatif Mao Ali Sakarya University https://orcid.org/0000-0002-6743-5362

DOI: https://doi.org/10.13135/2421-2172/3742

Keywords: Capital adequacy ratio, full-fledged Islamic banks, Gulf Cooperation Council.

Abstract

This study empirically analyzes bank-level and macroeconomic factors that have impact on the capital adequacy ratio (CAR) of the full-fledged Islamic banks in the Gulf Cooperation Council (GCC) and how they influence the banks’ capitalization decisions. This study covers a six years period ranging from 2013 to 2018. CAR ratio is a key stability indicator that measures the capability of banks to absorb unforeseen losses. To conduct the analysis, secondary data gathered from the annual financial reports of the banks as well from international economic database are used. Using multiple linear regression model, the effect of return on assets (ROA), return on equity (ROE), financing to deposit ratio (FDR), operating expense to operating income (OEOI), bank size (SIZE), non-performing financing (NPF) as bank-specific explanatory variables and economic growth (GDP) and inflation (INF) as a proxy for macroeconomic explanatory variables on the CAR of the banks are studied. Due to multicollinearity issues, ROA is dropped. As a result of the regression analysis, OEO and FDR are observed to positively and strongly impact CAR of the examined banks while SIZE is found to have negative and significant effect. ROE, NPF, GDP and INF demonstrated insignificant influences on the banks’ CAR. This study reveals varying and significant under and over regulatory capitalization decisions across the banks. Additionally, extreme expenditures and financial losses suffered by some banks are also discovered.

Author Biography

Abdilatif Mao Ali, Sakarya University

I am a postgraduate who is currently pursuing his masters degree in the field of Islamic economics and finance. In my undergraduate studies, I have focused my interest on accounting and finance - a field that I adore. I have always been a serious learner and managed to achieve significant grades throughout my academic years.
I am really interested in researching the financial aspects of the Islamic financial systems and hope to have a lasting contributions into the field. I

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