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DEPOSIT INSURANCE SYSTEM: AN EXPOSITION FOR THE ISLAMIC BANKS IN MALAYSIA

Year 2012, Volume: 4 Issue: 2, 427 - 438, 01.12.2012

Abstract

An important aspect of the new financial landscape is the increased focus on financial stability. A deposit insurance (DI) system accomplishes this purpose. While there are a great number of earlier studies that analyze the impact of DI on the conventional banking system, there is a lack of study that takes into account the moral hazard problem of DI on the Islamic banking system. Our paper aims to investigate the moral hazard implication by way of bank risk taking trailing the introduction of DI for the Islamic banks using the random effect model estimation for panel data. Malaysia is chosen as a sample for an Islamic banking system due to data availability and being the most advance country in Islamic banking. Our empirical study offers novel findings on the impact of the introduction of DI in both financial and operational risks taking for the Islamic banks. Our study reveals that Islamic banks have significantly higher operational risk after the introduction of DI. Added to that, our finding suggests that the risk-based premium method will significantly mitigate the moral hazard problem. We also find that management efficiency can be an alternative measure of operational risk

References

  • Bank for International Settlements and International Association of Deposit Insurers (2009), Core Principles for Effective Deposit Insurance Systems. http://www.bis.org/publ/bcbs156.pdf [Accessed 12.1.2010]
  • Chernykh, L., and Cole, R. A. (2011), Does Deposit Insurance Improve Financial Intermediation? Evidence from the Russian Experiment. Journal of Banking & Finance , 35, 388-402.
  • Demirguc-Kunt, A., and Huizinga, H. (2004), Market Discipline and Deposit Insurance. Journal of Monetary Economics , 51, 375-399.
  • Greene, W. H. (2012), Econometric Analysis (7 ed.). Upper Saddle River: Prentice Hall.
  • Gropp, R., and Vesala, J. (2004), Deposit Insurance, Moral Hazard and Market Monitoring. Review of Finance , 8, 571-602.
  • Hadad, M. D., Agusman, A., Monroe, G. S., Gasbarro, D., and Zumwalt, J. K. (2011), Market Discipline, Financial Crisis and Regulatory Changes: Evidence from Indonesian Banks. Journal of Banking and Finance , 35, 1552-1562.
  • Kane, E. J. (2000), Designing Financial Safety Nets to Fit Country Circumstances. World Bank Policy Research Working Paper No. 2453.
  • Lei, S., and Tzu-Pu, C. (2011), A Comprehensive Analysis of the Risk Effects of Risk Measures on Bank Efficiency:Evidence from Emerging Asian Countries. Journal of Banking and Finance , 35, 1727-1735.
  • Moosa, I. A. (2007), Operational risk: A Survey. Financial Markets, Institutions and Instruments, 16, 167-200.
  • Tiby, A. M. (2011), Islamic Banking: How to Manage Risk and Improve Profitability. Hoboken, New Jersey: John Wiley & Sons Inc.
  • Tuan, H. N., Ying, S. L., and Nya, L. T. (2010), Deposit Insurance and Bank Risks: The Case of Malaysia. European Journal of Economics, Finance and Administrative Sciences, 18, 19-27.
  • Yilmaz, E., and Muslumov, A. (2008), Deposit Insurance and Moral Hazard Problem: The Case of Turkish Banking System. Applied Economics, 40, 2147– 2163.
Year 2012, Volume: 4 Issue: 2, 427 - 438, 01.12.2012

Abstract

References

  • Bank for International Settlements and International Association of Deposit Insurers (2009), Core Principles for Effective Deposit Insurance Systems. http://www.bis.org/publ/bcbs156.pdf [Accessed 12.1.2010]
  • Chernykh, L., and Cole, R. A. (2011), Does Deposit Insurance Improve Financial Intermediation? Evidence from the Russian Experiment. Journal of Banking & Finance , 35, 388-402.
  • Demirguc-Kunt, A., and Huizinga, H. (2004), Market Discipline and Deposit Insurance. Journal of Monetary Economics , 51, 375-399.
  • Greene, W. H. (2012), Econometric Analysis (7 ed.). Upper Saddle River: Prentice Hall.
  • Gropp, R., and Vesala, J. (2004), Deposit Insurance, Moral Hazard and Market Monitoring. Review of Finance , 8, 571-602.
  • Hadad, M. D., Agusman, A., Monroe, G. S., Gasbarro, D., and Zumwalt, J. K. (2011), Market Discipline, Financial Crisis and Regulatory Changes: Evidence from Indonesian Banks. Journal of Banking and Finance , 35, 1552-1562.
  • Kane, E. J. (2000), Designing Financial Safety Nets to Fit Country Circumstances. World Bank Policy Research Working Paper No. 2453.
  • Lei, S., and Tzu-Pu, C. (2011), A Comprehensive Analysis of the Risk Effects of Risk Measures on Bank Efficiency:Evidence from Emerging Asian Countries. Journal of Banking and Finance , 35, 1727-1735.
  • Moosa, I. A. (2007), Operational risk: A Survey. Financial Markets, Institutions and Instruments, 16, 167-200.
  • Tiby, A. M. (2011), Islamic Banking: How to Manage Risk and Improve Profitability. Hoboken, New Jersey: John Wiley & Sons Inc.
  • Tuan, H. N., Ying, S. L., and Nya, L. T. (2010), Deposit Insurance and Bank Risks: The Case of Malaysia. European Journal of Economics, Finance and Administrative Sciences, 18, 19-27.
  • Yilmaz, E., and Muslumov, A. (2008), Deposit Insurance and Moral Hazard Problem: The Case of Turkish Banking System. Applied Economics, 40, 2147– 2163.
There are 12 citations in total.

Details

Other ID JA73TD39SZ
Journal Section Articles
Authors

Sharifah Adlina Syed Abdullah This is me

Rubi Ahmad This is me

Publication Date December 1, 2012
Published in Issue Year 2012 Volume: 4 Issue: 2

Cite

APA Abdullah, S. A. S., & Ahmad, R. (2012). DEPOSIT INSURANCE SYSTEM: AN EXPOSITION FOR THE ISLAMIC BANKS IN MALAYSIA. International Journal of Social Sciences and Humanity Studies, 4(2), 427-438.
AMA Abdullah SAS, Ahmad R. DEPOSIT INSURANCE SYSTEM: AN EXPOSITION FOR THE ISLAMIC BANKS IN MALAYSIA. IJ-SSHS. December 2012;4(2):427-438.
Chicago Abdullah, Sharifah Adlina Syed, and Rubi Ahmad. “DEPOSIT INSURANCE SYSTEM: AN EXPOSITION FOR THE ISLAMIC BANKS IN MALAYSIA”. International Journal of Social Sciences and Humanity Studies 4, no. 2 (December 2012): 427-38.
EndNote Abdullah SAS, Ahmad R (December 1, 2012) DEPOSIT INSURANCE SYSTEM: AN EXPOSITION FOR THE ISLAMIC BANKS IN MALAYSIA. International Journal of Social Sciences and Humanity Studies 4 2 427–438.
IEEE S. A. S. Abdullah and R. Ahmad, “DEPOSIT INSURANCE SYSTEM: AN EXPOSITION FOR THE ISLAMIC BANKS IN MALAYSIA”, IJ-SSHS, vol. 4, no. 2, pp. 427–438, 2012.
ISNAD Abdullah, Sharifah Adlina Syed - Ahmad, Rubi. “DEPOSIT INSURANCE SYSTEM: AN EXPOSITION FOR THE ISLAMIC BANKS IN MALAYSIA”. International Journal of Social Sciences and Humanity Studies 4/2 (December 2012), 427-438.
JAMA Abdullah SAS, Ahmad R. DEPOSIT INSURANCE SYSTEM: AN EXPOSITION FOR THE ISLAMIC BANKS IN MALAYSIA. IJ-SSHS. 2012;4:427–438.
MLA Abdullah, Sharifah Adlina Syed and Rubi Ahmad. “DEPOSIT INSURANCE SYSTEM: AN EXPOSITION FOR THE ISLAMIC BANKS IN MALAYSIA”. International Journal of Social Sciences and Humanity Studies, vol. 4, no. 2, 2012, pp. 427-38.
Vancouver Abdullah SAS, Ahmad R. DEPOSIT INSURANCE SYSTEM: AN EXPOSITION FOR THE ISLAMIC BANKS IN MALAYSIA. IJ-SSHS. 2012;4(2):427-38.