Analysis of Loan Loss Provisions: Malaysia and Gulf Corporation Countries (GCC) Islamic Banks
DOI:
https://doi.org/10.31436/jif.v4i2.90Abstract
This paper examines the relationship between loan loss provisions (LLP) in connection with bank profitability, bank liquidity and bank capital. We investigate loan loss provisions (LLP) of Islamic banks in Malaysia and the Gulf Cooperation Council (GCC). This paper seeks to analyze a full-fledged Islamic banking system operating on a parallel basis with a full-fledged conventional system. The sample micro balance panel data analysis comprises a total of 196 Islamic banks covers the period 2006-2012. Analysis was carried out via Generalized Methods of Moments (GMM) model. The authors estimate Generalized Methods of Moments (GMM) models perfectly to overcome endogeneity problems. The evidence remains valid for all instrument used in this study, including loan loss provisions, total deposit ratio, equity loan ratio, and return on average equity and gross domestic products. The empirical result shows loan loss provisions (LLP) is found to be statistically significant for our full samples and GCC Islamic banks but not in the case of Malaysian Islamic banks.
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References
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Blundell, R., & Bond, S. (1998). Initial Conditions and Moment Restrictions in Dynamics Panel Models. Journal of Econometrics, 87, 115-143.
Bouvatier, V. A. (2012). Effect of Loan Loss Provisions on Growth in Bank Lending: Some International Comparison. International Economics , 91-116.
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Collins, J., Shackelford, D. &Wahlen, J. (1995).Bank Differences in the Coordination of Regulatory Capital, Earnings and Taxes.Journal of Accounting Research, 33(2), 263-91.
Francis, J.R., LaFond, R., Olsson, P.M., &Schipper, K. (2004). Costs of Equity and Earnings Attributes. Accounting Review, 79 (4), 967-1010.
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Lepetit, V. B. (2012). Effects of Loan Loss Provisions on Growth in Bank Lending: Some International Comparisons. International Economics 132 , 91-116.
Masaru, Y., & Yukihiro, K. (2004). Factors affecting bank risk taking: Evidence from Japan. Journal of Banking and Finance , 215-232.
Ma, C.K. (1988).Loan Loss Reserve and Income Smoothing: the Experience in the US Banking Industry.Journal of Business Finance & Accounting, 15(4), 487-97.
Naciri, A. (2002). Earnings Management From Bank Provisions For Loan Losses. Working Paper, 4, University of Quebec, Management Research Center, Montre´al, PQ.
Niswander, F. & Swanson, E.P. (2000).Loan, Security, and Dividend Choices by Individual (unconsolidated) Public and Private Commercial Banks.Journal of Accounting & Public Policy, 19(3), 201-35.
Scholes, M.S., Wilson, P.G. & Wolfson, M.A. (1990).Tax Planning, Regulatory Capital Planning and Financial Reporting Strategy for Commercial Banks.The Review of Financial Studies, 3(4), 625-50.
Shahimi, S., Ismail, A.G. & Ahmad, S. (2006). A Panel Data Analysis of Fee Income Activities in Islamic Banks.J.KAU: Islamic Econ., 19(2), 23-35.
Young’s, E. (2013). World Islamic Banking Competitiveness Report 2013. Mena: Ernst & Young’s.
Zoubi, T.A. & Al-Khazali, O. (2007). Empirical Testing of the Loss Provisions of Banks in the GCC Region. Managerial Finance, 33(7), 500-511.
Ahmad, H. A. (2013). Credit risk of Islamic banks in GCC countries. International Journal of Banking and Finance , 121-135.
Ahmed, H. (2006). Risk Management Assesment Systems: An Application to Islamic Bank. Islamic Economic Studies , 63-86.
Anandarajan, A., Hasan, I. &Loranzo-Vivas, A. (2003). The Role of Loan Loss Provisions in Earnings Management, Capital Management, and Signaling: the Spanish Experience. Advances in International Accounting, 16, 43-63.
Anandarajan, A., Hasan, I. & Lozano-Vivas, A. (2005). Loan Loss Provision Decisions: an Empirical Analysis of the Spanish Depository Institutions. Journal of International Accounting, Auditing and Taxation, 14(1), 55-77.
Anderson, T. W., & Hsiao C. (1981). Estimation of Dynamics Models with Error Components, Journal of American Statistical Association, 76, 598-606.
Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Review of Economic Studies 58 , 277-297.
Arellano, M., & Bover, O. (1995). Another Look at the Instrument Variables Estimation od Error Component Model. Journal of Econometrics, 68 , 29-51.
Agarwal, S., Chomsisengphet, S., Liu, C. & Rhee, S.G. (2007). Earnings Management Behaviors Under Different Economic Environments: Evidence From Japanese Banks. InternationalReview of Economics and Finance, 16(3), 429-443.
Balla, E., Rose, M.J., & Romero, J.J. (2012).Loan Loss Reserve Accounting and Bank Behavior. Richmond Fed Economic Brief (March).
Bhat, V. (1996). Banks and Income Smoothing: an Empirical Analysis. Applied Financial Economics, 6(6), 505-10.
Blundell, R., & Bond, S. (1998). Initial Conditions and Moment Restrictions in Dynamics Panel Models. Journal of Econometrics, 87, 115-143.
Bouvatier, V. A. (2012). Effect of Loan Loss Provisions on Growth in Bank Lending: Some International Comparison. International Economics , 91-116.
Central Bank of Malaysia. (2004). Guidelines on the Governance of Shariah Committees for Islamic Financial Institutions. Malaysia: Central Bank of Malaysia.
Collins, J., Shackelford, D. &Wahlen, J. (1995).Bank Differences in the Coordination of Regulatory Capital, Earnings and Taxes.Journal of Accounting Research, 33(2), 263-91.
Francis, J.R., LaFond, R., Olsson, P.M., &Schipper, K. (2004). Costs of Equity and Earnings Attributes. Accounting Review, 79 (4), 967-1010.
Fonseca, A.R. & Gonzalez, F. (2008).Cross-country Determinants of Bank Income Smoothing by Managing Loan-loss Provisions.Journal of Banking & Finance, 32(2), 217-28.
Greenawalt, M. &Sinkey, J. Jr (1988). Bank Loan Loss Provisions and the Income Smoothing Hypothesis: an Empirical Analysis 1976–1984. Journal of Financial Services Research, 1(4), 301-318.
Hasan, I. & Wall, L. (2004). Determinants of the Loan Loss Allowance: Some Cross-country Comparison.The Financial Review, 39(1), 129-52.
Hassan, M. K., & Mollah, S. (2014, March 29). Corporate Governance, Risk Taking and Firm Performance of Islamic Banks during Global Financial Crisis. Retrieved March 29, 2014, from http://cbagccu.org/files/pdf/3/2.pdf: http://cbagccu.org/files/pdf/3/2.pdf
Hassane Cisse, N. R. (2013). The World Bank Legal Review, Volume 5: Fostering Development through Opportunity, Inclusion, and Equity. In N. R. Hassane Cisse, The World Bank Legal Review, Volume 5: Fostering Development through Opportunity, Inclusion, and Equity (pp. 130-131). Washigton D.C.: The World Bank.
Ismail, A.G. & Be Lay, A.T. (2002). Bank Loans Portfolio Composition and the Disclosure of Loan Loss Provision: an Empirical Evidence of Malaysian Banks. Asian Review of Accounting, 10(1), 147-62.
Ismail, A.G., Shaharudin, R.S. &Samudhram, A.R. (2005). Do Malaysian Banks Manage Earnings Through Loan Loss Provisions?.Journal of Financial Reporting and Accounting,3(1), 41-47.
Lepetit, V. B. (2012). Effects of Loan Loss Provisions on Growth in Bank Lending: Some International Comparisons. International Economics 132 , 91-116.
Masaru, Y., & Yukihiro, K. (2004). Factors affecting bank risk taking: Evidence from Japan. Journal of Banking and Finance , 215-232.
Ma, C.K. (1988).Loan Loss Reserve and Income Smoothing: the Experience in the US Banking Industry.Journal of Business Finance & Accounting, 15(4), 487-97.
Naciri, A. (2002). Earnings Management From Bank Provisions For Loan Losses. Working Paper, 4, University of Quebec, Management Research Center, Montre´al, PQ.
Niswander, F. & Swanson, E.P. (2000).Loan, Security, and Dividend Choices by Individual (unconsolidated) Public and Private Commercial Banks.Journal of Accounting & Public Policy, 19(3), 201-35.
Scholes, M.S., Wilson, P.G. & Wolfson, M.A. (1990).Tax Planning, Regulatory Capital Planning and Financial Reporting Strategy for Commercial Banks.The Review of Financial Studies, 3(4), 625-50.
Shahimi, S., Ismail, A.G. & Ahmad, S. (2006). A Panel Data Analysis of Fee Income Activities in Islamic Banks.J.KAU: Islamic Econ., 19(2), 23-35.
Young’s, E. (2013). World Islamic Banking Competitiveness Report 2013. Mena: Ernst & Young’s.
Zoubi, T.A. & Al-Khazali, O. (2007). Empirical Testing of the Loss Provisions of Banks in the GCC Region. Managerial Finance, 33(7), 500-511.
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Published
2015-11-17
How to Cite
Mat Rahim, S. R., Ahmad Nazar, S., & Ramli, N. (2015). Analysis of Loan Loss Provisions: Malaysia and Gulf Corporation Countries (GCC) Islamic Banks. Journal of Islamic Finance, 4(2). https://doi.org/10.31436/jif.v4i2.90
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