Risk-Taking in Public versus Private Banks: Evidence from Islamic Banking

Abstract

This study examines risk-taking by publicly traded and privately owned banks in an Islamic banking sector employing a diversified international sample of 133 IBs across 35 countries. Unlike the vast majority of previous research, this study uses ordinary least squares (OLS) and Heckman's two-step models to analyse a comprehensive risk-taking by two proxies. It investigates the risk and stability features using the credit risk and Z-score as the insolvency proxy. The study finds that publicly traded banks engage in more risky activities than their privately owned peers. The study further analyses the link between ownership structure and risk in Islamic banks, finding that state ownership shows that it is not a determinant in taking risk differences. On the other hand, institutional investors are more likely to engage in risky activities when they hold higher stakes. Despite this, the results provide some advice to the financial actors in their attempts to deliver information to the risk-taking practices in concert with regulators and international policymakers.