Bankruptcy Forecasting and Economic Sustainability Profile of the Market Leading Islamic Banking Countries

Bankruptcy Forecasting and Economic Sustainability Profile of the Market Leading Islamic Banking Countries

Amin Jan (Universiti Teknologi Petronas, Seri Iskandar, Malaysia), Maran Marimuthu (Universiti Teknologi Petronas, Seri Iskandar, Malaysia), Muhammad Pisol bin Mohd @ Mat Isa (Universiti Teknologi Petronas, Seri Iskandar, Malaysia) and Muhammad Kashif Shad (Universiti Teknologi Petronas, Seri Iskandar, Malaysia)
Copyright: © 2019 |Pages: 18
DOI: 10.4018/IJABIM.2019040104

Abstract

This study used bankruptcy forecasting as a proxy for measuring economic sustainability profile of the Islamic banks in the market leading Islamic banking countries. The countries are Malaysia, Saudi Arabia, Iran, UAE and Kuwait. A sample of 29 Islamic banks with a post-crisis period data from 2009-2013 was collected for empirical testing. Results indicated that Saudi Arabian Islamic banks recorded the most minimal bankruptcy rate of 29 percent, followed by UAE with 31 percent, Kuwait with 48 percent, Malaysia with 55 percent and Iran with 68 percent respectively. The results further indicated that profitability, liquidity, insolvency, and productivity ratios have a significant positive impact on bankruptcy profile of the selected Islamic banks. This study lends credence to multiple stakeholders for taking appropriate measures regarding the deteriorating economic sustainability of the Islamic banks in the market leading Islamic banking countries. It also urges to develop a separate Shariah-based sustainability measurement framework for the Islamic banks.
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1. Introduction

The financial crisis of 2007-2008 exposed sustainability policies of the banking industry. That gave new spirit and direction for regulating economic sustainability of the banking industries (Clerc et al., 2014). Different guidelines and frameworks such as that of the Global Reporting Initiatives GRI were introduced to make the banking models more sustainable. Still the percentage of those organizations which maintain strong economic sustainability is limited (Leon, 2001). The debate on sustainable banking has already begun, as the autonomous network of banks, the Global Alliance for Banking on Values GABV have started its operations in May 2011 with the purpose to design and offer sustainable banking policies. Sustainable banking refers to the role of banks in the economy, environment and the society. It is known as the Triple Bottom Line up TBL approach.

The banking industries are believed to have a major share in the countries’ economies. Because of its major share and the central role in the financial system, the banking industries holds a pivotal position in the financial systems of the world. Holistically the economic growth of economies is tied to the successful sustainable operations of the banking industries (Brown, 2003; Jeucken & Bouma, 1999; Safiullah, 2010). But on the other hands, the banking industries can deteriorate the economic condition in case of its failure (Cecchetti, 2015; Iman van Lelyveld, 2006). Evidence shows that the world economy faced a large scale economic turmoil because of failure of the big international banks such as Lehman Brother’s investment bank, Citigroup New York etc.

Against this background, it is vital to regularly monitor and develop efficient sustainability measurement frameworks for the banking industries in order to avoid a future financial crisis (Jan & Marimuthu, 2015; Rashid & Nishat, 2009). Inline of the growing need and research on sustainability, studies found that sustainability reporting from the Islamic banking industry around the world is still low (Ahmed Haji & Anum Mohd Ghazali, 2013; Alsaadi, Ebrahim, & Jaafar, 2017; Belal, Abdelsalam, & Nizamee, 2015; Farook, Kabir Hassan, & Lanis, 2011; Haniffa & Hudaib, 2007; A. Hassan & Syafri Harahap, 2010; Mallin, Farag, & Ow-Yong, 2014; Meutia & Febrianti, 2017; Nobanee & Ellili, 2016; Yusoff & Darus, 2014).

The performance of the Islamic banking industry is studied from different angles such as the profitability determinants of Islamic banks (M. K. Hassan & Bashir, 2003). Liquidity risk management in the Islamic banking industry (Ismal, 2010). Insolvency risk management in Islamic banks (Čihák & Hesse, 2010). Productivity and efficiency of Islamic banking (El Moussawi & Obeid, 2011). Technical efficiency of Islamic banking (Sufian, 2007). Foreign vs. domestic Islamic bank performance (Muda, Shaharuddin, & Embaya, 2013). Islamic vs. conventional bank performance (Qureshi & Shaikh, 2012). Role of Islamic banking in the financial crisis (Said, 2013). And performance comparison among different Islamic banks (Saleh & Zeitun, 2006). However, all the previous studies of the Islamic banking industry were concerned with the ongoing performance of Islamic banking. The studies relating to future forecastings such as bankruptcy and sustainability are found rare in the Islamic banking literature (Čihák & Hesse, 2010; Jan & Marimuthu, 2015).

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